The Performance Effects of Diversification in the Context of Its Decline: A Meta-Analytical Review

Abstract

We study changes in the performance effects of diversification in the context of the decline in levels of diversification over time. We argue that the decrease in levels of unrelated diversification has been greater than that of related diversification. We also expect the aggregate effects of diversification on firm performance to have improved over time, and the differences between the performance effects of related and those of unrelated diversification to have decreased. We employ two meta-analytical approaches (MARA and HOMA) in order to test our hypotheses, using a total of 267 primary studies containing 387 effect sizes and over 150,000 firm-level observations from over 60 years of research on the diversification–firm performance relationship. The findings support our hypotheses. We contribute to the corporate strategy literature by arguing that the pressure to reduce diversification may have affected those firms particularly strongly whose diversification strategies were most detrimental to firm performance. Our study is the first one to investigate the secular shift in the performance effects of diversification.