Abstract
We combine a resource-base view logic and recent literature that analyzes strategic liabilities to identify the contingencies under which related diversification may destroy rather than create firm value. Related diversification is associated with lower financial performance when the inputs shared across industries become highly illegitimate. This value destroying nature of relatedness is greater for firms that possess strong capabilities around these illegitimate inputs. We test and find empirical support for our hypotheses in the context of manufacturing firms dealing with toxic chemicals.
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