The diversification–performance nexus: mediating role of information asymmetry

Abstract

We investigate further the inconsistencies of the diversification–performance nexus by introducing information asymmetry as a mediating factor. Data of 12,176 firms from eleven developing, emerging and developed economies over the 2010–2017 period were used to conduct a panel data analysis excluding the financial industries. To test the impact of corporate diversification on firm performance, we use a firm-year fixed effects panel data model to control for firm heterogeneity and any other unobservable firm-level attributes, for example, management quality, corporate norms, and culture which are supposed to be time-invariant and may influence the results. The findings are qualitatively valid when we use system dynamic panel data General Methods of Moments (GMM) estimator for endogeneity concerns. Besides, we follow a three-step procedure proposed by Muller and Judd (J Pers Soc Psychol 89(6):852–863, 2005) to test the potential mediating effect of information asymmetry. We find that industrial diversification is significantly and positively associated with firm performance while international diversification shows no effect on performance in developing and emerging markets. We also find that information asymmetry strongly mediates the relationship between corporate diversification strategies and firm performance in developing and emerging economies as compared to developed economies. Our findings suggest that corporate diversification is not considered as a value decreasing strategy that calls for more attention of regulators on enabling managers to show the potential advantages of corporate diversification that generates a positive signal to shareholders.