Affiliation:
1. School of Business and Economics, University of Azores and Ceeapla 9500-321 Ponta Delgada Portugal
2. School of Business and Economics, University of Azores 9500-321 Ponta Delgada Portugal
3. Faculty of Applied Sciences, Wsb University 41-300 Dabrowa Górnicza Poland
Abstract
It is a fact that a company’s durability may depend on its capacity to readjust to a world in continuous change. Diversification strategies should be a security device, reduce the risk, and at the same time, search for possible profitable opportunities. Therefore, when a diversified firm follows one of its business sections and realizes that the performance is worse than foreseen, this negative impact may be diminished by other segments with better performance. Contextually, the current study aims to determine a correlation between value and corporate diversification in the Iberian market. We use Tobin’s Q as the measure for value and the Herfindahl Index to measure diversification. In addition to the study of correlation, this paper also analyses the level of diversification for the firms that integrate the Iberian market and if their market value is above or below their book value. Using these metrics, we found a negative correlation between value and diversification in the Iberian Market. In our sample, we also found that highly diversified firms performed worse than focused firms on average. In the Portuguese sample, we were able to determine the level of diversification that maximizes the Tobin’s Q of a firm. According to Tobin's Q, our sample was characterized by a low level of diversification in general and that the companies were slightly overvalued.
Publisher
World Scientific and Engineering Academy and Society (WSEAS)
Subject
Economics and Econometrics,Finance,Business and International Management
Reference23 articles.
1. Tripathi, P.C. and Reddy, P.N., Principles of Management. New Delhi: Tata McGraw-Hill, 2006. ISBN: 0070600589 9780070600584
2. Flamholtz E.G. and Randle, Y., Growing Pains: Building Sustainably Successful Organization,. 5th Edition. 2020. ISBN-10: 1118916409
3. Kochanska, A., and Castanho, R.A., The Relevance of Planning to Achieve a Successful Company. A Brief Overview, Revista Científica Monfragüe Resiliente – Scientific Journal. Vol. XII (1). 2019, pp.342-355. ISSN 2340-5457.
4. Orhan, A., Benli, V.F., and Castanho, R.A., Assessing the Systemic Risk Between American and European Financial Systems, Prague Economic Papers, Vol. 18, No. 3, 2020, pp. 487 – 502, July 2020 https://doi.org/10.18267/j.pep.756
5. Santalo, J. and Becerra, M., Competition from Specialized Firms and the Diversification– Performance Linkage, Journal of Finance 63 (2), 2008.