Corporate diversification and firm performance: An inverted U-shaped hypothesis

Abstract

This study aimed to investigate the relationship between corporate diversification and firm performance in a developing country. Previous studies have found that the mixed results have been established between these two constructs in developed countries such as linear, u-shaped or inverted u-shaped relationship. To this end, a sample of 141 non-financial companies over the period of 2003 to 2013 listed on Pakistani stock market was used to analyze the impact of diversification strategy on the performance of firm. Corporate diversification is divided into two types including product and geographic diversification. The findings of the study demonstrated that an inverted u-shaped relationship existed as performance increased up to a certain level due to the related diversification strategy and then it fell down drastically. It showed that too much diversification creates agency problems and internal inefficiencies. It has implications for agency problems, weak corporate governance structures, and family relationships. What factors do motivate companies to diversify their businesses over the globe? There could be several plausible explanations for corporate diversification. We now live in an uncertain, dynamic, volatile, and competitive business environment that has brought new challenges and opportunities for growth and development. These environmental forces pose some serious threats to very survival of the organization. In recent period of privatization, globalization, and liberalization, some massive growth and development opportunities provide a chance for multinational companies to pass their national borders and increase their profitability. Thus, the