Geographic diversification, performance, and the risk profile of UK construction firms

Abstract

PurposeExecutives are often faced with the challenge of making sound decisions regarding the product and geographic markets into which the company should diversify. This situation is even more glaring with respect to construction companies, owing to the volatile nature of the construction market. The purpose of this paper is to present empirical results on the impact of geographic diversification on the performance and risk profiles of construction firms in the UK.Design/methodology/approachPublished financial data of construction firms covering the period 1995‐2004 are employed in the paper. From this data, extent of geographic diversification, performance, and risk are computed. Firms are grouped based on the extent of diversification into undiversified, moderately diversified, and highly diversified. Performance of these groups is then compared using the t‐statistic based on return on equity (ROE), return on total asset (ROTA), return on capital employed (ROCE), and profit margin (PM).FindingsThe results show that firms that remain focused within the UK market outperform those that expand into international markets on PM only. There is no significant difference in performance based on ROE, ROTA, and ROCE. However, as expected, highly diversified firms are found to exhibit the best risk profile.Originality/valueThese results are invaluable to managers in strategic decision making. They also provide a first step to understanding the nature of the relationship between geographic spread and performance of UK construction firms.