Abstract
PurposeThe study aims to fill a gap in the literature on the economic impact of industrial and international diversification on firm performance in the energy sector. Li et al. (2016) investigate firms listed in China, and this study analyzes firms listed in (Western) Europe.Design/methodology/approachA sample of 129 energy firms is extracted from Datastream and covers the period from January 2009 to December 2015. Univariate and multivariate regression analyses are used to determine a plausible relation of diversification on corporate performance. Also, the difference between renewable energy firms and conventional energy firms is explored.FindingsA univariate analysis using both return on assets andTobin's Qas a variable shows that renewable energy firms have a higher profitability than conventional energy firms. However, a multivariate analysis does not confirm this result. The authors also document a negative relation between diversification strategies and firm performance.Research limitations/implicationsThe study uses main industry codes. Yet, one might make a distinction between renewable energy and conventional energy amounts with corporations. Also, the authors cover financial crisis years. Researchers might take into account more recent years.Practical implicationsThe findings of the study highlight the importance of short-term and long-term considerations for practitioners related to demand, the energy mix, oil prices and firm strategies.Originality/valueThe authors contribute to the debate and the literature when identifying similarities and differences between conventional energy firms and renewable energy firms in their application of diversification strategies and their (relation to) firm performance.
Highlights
The energy industry is facing a rapidly changing environment
We show with a univariate analysis, using a sample of 52 conventional and 77 renewable energy firms in Europe between 2009 and 2015, that renewable energy firms have a higher profitability in terms of return on assets (ROA) compared to conventional energy firms, and lower market valuations (Tobin’s Q)
These results suggest that profitability and leverage are higher in renewable energy firms while foreign activities are lower
Summary
The energy industry is facing a rapidly changing environment. Conventional energy companies need to modify their business strategies and be prepared to new market conditions. More firms enter into renewable energy markets. The Paris Agreement of October 2016 is a premonition that governments, and indirectly firms, will have to introduce new measures to achieve the climate requirements (United Nations, 2015). Various strategies have to be used by firms to offset negative effects of new rules and regulations. Firms generally apply an array of different strategies to strengthen their market position and increase their performance, with the literature being inconclusive on which parameters do have a positive impact on it
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