Effect of diversification on firm performance: Application of the entropy measure

Abstract

This study investigated the effects of diversification on firm performance in the restaurant industry. In prior studies, the theoretical rationales and empirical results appeared to contradict each other. These contradictory results may be due to factors such as industry-specific characteristics or a linear understanding of the relationship between diversification strategies and firm performance. Thus, this study suggested a non-linear hypothesis based on the costs and benefits of diversification strategies with businesses categorized based on their level of diversification. The results of this study showed that restaurant firms do not benefit from a low level of related diversification. This study also found that when restaurant firms are involved in both related and unrelated businesses, the optimal mixed ratio of diversification is approximately half and half. More detailed results, as well as academic and practical implications, are discussed in this paper.