Does the Method of Corporate Diversification Matter to Firm’s Performance?

Abstract

Corporate diversification is a strategy that enables corporations to expand their core business into other businesses. In Malaysia, corporate diversification continues to represent a fundamental organizational structure. Some two-thirds of Malaysian firms are diversified. However, when compared to developed countries such as the US and the UK, we find that firms are moving toward non-diversification. The study is based on the population framework consisting of all of the public limited companies (PLCs) listed on the Bursa Malaysia stock exchange from 2007 to 2012. A dynamic panel model system generalized method of moments (GMM) was used to analyze the diversification and firm’s performance theories.

The empirical findings demonstrated that diversification is better than non-diversification firms for the curvilinear relationship between diversification and firm’s performance (ROA and Tobin-Q) when using the entropy index and relatedness is taken into consideration. The research further concluded that related and unrelated diversification also has a positive relationship with performance, but diversification must be the dominant (focused) and cannot be too broad in nature. Diversification that is too broad may cause a positive relationship to turn in to a negative relationship toward performance in both related and unrelated instances of diversification.

Citation

Chan, L.-F., AN, B.-A. and Nasir, A.B.M. (2019), "Does the Method of Corporate Diversification Matter to Firm’s Performance?", Asia-Pacific Contemporary Finance and Development (International Symposia in Economic Theory and Econometrics, Vol. 26), Emerald Publishing Limited, Leeds, pp. 207-233. https://doi.org/10.1108/S1571-038620190000026011