Diversifying Entry, Resource Relatedness, and Redeployability: Evidence from a Natural Experiment

Abstract

The topic of related diversification is of fundamental interest to strategy research. However, the understanding of how the potential for resource redeployment might encourage related diversification is limited. This paper explores the impact of the 2006 German real estate transfer tax (RETT) reform, which led to higher RETT rates but retained the exemption from RETT for corporate restructurings. We propose that firms might have reacted strategically to the threat of higher transfer taxes by combining closely related businesses into a portfolio, providing an efficient substitute market for reallocating property assets in the event of business-specific shocks. Consistent with a dynamic perspective on relatedness, difference-in-differences analyses of the European retail market show that the probability of entry into closely related businesses increased significantly for firms that were affected by the reform, relative to control firms. This finding contributes to the literature that links firm boundary choices to inter-temporal economies of scope and offers new insights into the real effects of transfer tax policies.