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This paper examines empirically how growth opportunities determine the relationship between corporate diversification and firm's value in an emerging economy.

This study employs annual data of Indonesian manufacturing firm's spanning five years. To test the potential nonlinear relationship between diversification and value, nonlinear regression model is employed. Baron and Kenny’s (1986) procedure is also employed to test the mediation role of the growth opportunities in the relation between diversification strategy and firm's value. This study also performs further robustness analysis on mediating role of growth opportunities on the relationship between diversification strategy and corporate value using path analysis approach.

The analyses reveal the U-shaped diversification and value relationship; this result suggests that the effect of diversification on value will vary across firms, the negative effect of diversification strategy on firm's value may reverse at higher levels of diversification. Further analysis indicates that such relationship is fully mediated by firm's growth opportunities.

Given the results, firms that are considering implementing diversification strategy should seek the optimal level of diversification to gain diversification premium. Furthermore, the manager should observe the best opportunities available for the firm before undertaking the diversification strategies.

This paper contributes to the existing literature on diversification strategy by extending the insight of this research area of a large emerging economy, on which prior studies have not reached conclusive results.