Abstract
Prior empirical studies on the relationship between corporate diversification and firm performance have not considered data stationarity and have devoted little consideration to the dynamics of this relationship, the endogeneity problem, and causality factors. To overcome these econometric problems simultaneously, a panel vector autoregressive model is applied to product diversification data on Japanese firms. The empirical results suggest the followings. First, the panel unit-root test recommends the use of diversification, and not diversity. Second, product diversification measured by the Herfindahl index has no relationship with the other three firm performance variables, while product diversification measured by the entropy index marginally increases sales growth, leading to an increase in profitability. The empirical implications for business researchers are also provided.
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