Diversification and organizational environment: the effect of resource scarcity and complexity on the valuation of multi-segment firms

Abstract

In this study, we examine the effect of corporate diversification on firm valuation and the extent to which resource scarcity and complexity of the organizational environment moderate this relationship. Analyzing a dataset of 4437 North American firms that covers the years 1998 through 2015, we find that diversification reduces firm valuation. In addition, we find that resource scarcity significantly decreases and that environmental complexity significantly increases this diversification discount. Our findings emphasize the relevance of environmental resource endowment and complexity when determining the value of multi-segment firms.