A Re-Examination of Diversification and Firm Productivity

Abstract

ABSTRACT The advantages and disadvantages of diversification have been widely debated by academics, as well as business professionals, and the majority of studies suggest that diversification destroys firm value. The effect of overall diversification (without categorizing whether such diversification is related or unrelated to the business) on productivity has been investigated as well, but with similar conflicting results. In this paper, we investigate the effects of the two types of diversification on productivity. We find that related diversification enhances firm productivity, whereas unrelated diversification reduces firm productivity. We also find that the previously recorded link between diversification and firm value is partially mediated by productivity. Our paper offers further empirical evidence toward resolving the conflicting findings of prior research, and provides practitioners with additional points for consideration when engaging in firm diversification.