Abstract
We study the relationship between diversification and firm performance through longitudinal studies. We control for the persistence of firm’s abnormal returns, using the NAICS codification and the new reporting standard SFAS 13 for the identification of business segments. We find that this relationship is not causal. Firms’ abnormal return persistence is the fundamental element in the explanation of the relationship between diversification and firm performance compared to the main assumptions in strategy and finance. We conclude that some diversified firms persistently beat the market index, have better growth opportunities, and lower volatility, while others consistently have the opposite results. Moreover, we find that higher performance within diversified firms is associated to an unrelated business portfolio.
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