Cui bono? An empirical investigation into risk benefits of corporate diversification

Abstract

While the diversification–performance link is well covered in strategy research, we know much less about the link between firm diversification and risk. This article draws from modern portfolio theory and corporate diversification theory to derive a comprehensive set of hypotheses on the impact of related and unrelated diversification on the systematic risk, total risk, and bankruptcy risk of a firm. Based on a large international sample, we find the portfolio effect to be more important than previously thought, while synergy effects appear to be largely counterbalanced by the direct and indirect costs of diversification. Specifically, we find that systematic risk is not reduced by corporate diversification, while bankruptcy risk is significantly lower in diversified firms, possibly leading to conflicts between shareholders and other stakeholder groups.