This study reexamined the performance outcome of diversification strategies by combining the advantages of security-market-based measures and Rumelt's classification scheme. The findings underscore the popular, though weakly supported, belief that controlled diversity is associated with the highest performance. Specifically, firms that diversified in a constrained manner demonstrated significantly lower levels of systematic risk and significantly higher levels of shareholder returns than firms employing other strategies.
We study the relationship between diversification and firm performance in the context of the decline in levels of diversification over time. We argue that the pressure to reduce diversification may have more strongly affected those firms whose diversification strategies were most detrimental to firm performance. We employ meta-analytical regression (MARA) in order to test our hypotheses, using a total of 267 primary studies containing 387 effect sizes based on 150,000 firm-level observations from over 60 years of research on the diversification–firm performance relationship. The findings suggest that levels of unrelated diversification have decreased, whereas levels of related diversification have increased since the mid-1990s, following an initial decrease in the 1970s and 1980s. Furthermore, we find that the relationship between unrelated diversification and firm performance has improved significantly over time, whereas the relationship between related diversification and performance has remained relatively stable.
We investigate the idea that firms diversify to utilize excess capacity of resources. Knowledge of these resources allows us to make predictions about the direction of a firm's expansion. We expect...