Diversification Performance Research Articles

Using machine learning to revisit the diversification–performance relationship

AbstractResearch SummaryIn this article, we examine the relationship between corporate diversification and firm performance using a machine learning technique called natural language processing (NLP). By applying a widely used NLP technique called topic modeling to unstructured text from annual reports, we create a new, multidimensional measure that captures the degree of diversification of both multisegment and single‐segment firms. Additionally, we introduce a novel method to incorporate human judgments into the interpretation of machine‐learned patterns, which allows us to measure diversification across multiple dimensions, such as products and geographies. Finally, we illustrate how these new measures can generate novel insights into the relationship between the degree and type of diversification and firm performance, furthering our understanding of the diversification–performance relationship.Managerial SummaryAt some point, most firms face dilemmas about whether to diversify their business activities across industries or geographic markets—an important decision that invariably affects firm performance. Albeit very important, the direction of a relationship between diversification and firm performance is not always clear. Inconsistent results of previous studies are partially driven by inherent difficulties in reliably measuring diversification. This study introduces a novel methodology to address that problem: a machine learning‐based technique to quantify diversification from unstructured corporate annual report texts. An analysis of firm performance based on these novel diversification measures suggests that diversification, in contrast to earlier studies that find a diversification discount, is associated with higher firm value—a premium particularly pronounced for firms diversifying within a single industry.

Corporate Diversification and Financial Performance of Listed Firms in Kenya: Does Firm Size Matter?

Purpose: The study tested the hypothesis about the relationship between corporate diversification and financial performance. Moreover, moderating effect of firm size on the relationship between corporate diversification and financial performance of listed firms at Nairobi securities exchange (NSE) in Kenya was tested. Methodology/Approach/Design: The study was informed by market power and resource-based view (RBV) theories. To test the hypotheses, secondary panel data were collected from 35 listed firms at NSE from 2003 to 2017. Results: From panel regression analysis output, there was a significant positive (β = 2.225, p value = .000 < .05) relationship between corporate diversification and financial performance. Furthermore, firm size had a negative and significant (β = -.155, p value = .031<.05) moderating effect in the relationship between corporate diversification and financial performance. Practical Implications: The study thus concluded that firm size had a buffering effect in the link between corporate diversification and the financial performance of listed firms in Kenya. The findings of the study could be relevant to policymakers in drafting policies that affect diversification strategies of firms. For further research, the study recommended an increase of scope, other measurement approaches, analysis of corporate diversification from different perspectives other than product, and controlling for board characteristics. Originality/Value: The study while controlling the age of the firm tested the moderation effect of firm size in the relationship between corporate diversification and financial performance.

The Dark Side of Globalization: Evidence from the Impact of COVID-19 on Multinational Companies

The COVID-19 pandemic has led to economic and health crises (“twin crises”) worldwide. Using a sample of firms from 74 countries over the period January to August 2020, we examine stock price reactions of multinational corporations (MNCs) and purely domestic companies (DCs) to the crisis. We find that, on average, MNCs suffer a significantly larger decline in firm value relative to DCs during the stock market crisis caused by the pandemic, with their significant post-crisis recovery not fully offseting the decline. The relative underperformance of MNCs holds across all regions, except North America and Latin America & the Caribbean, and across all Fama–French industries, except chemicals, healthcare/drugs, and finance. We then examine the effect of government responses on the valuation gap and find that stronger government responses exacerbate the MNC under-performance. Finally, we show that a stronger financial system mitigates negative crisis returns, especially under stronger government reponses, while real factors, such as the firm’s supply chain, investments in human capital, research and development exacerbate negative crisis returns. Our findings have important implications for managers of MNCs and government policymakers alike and contribute to studies on the international diversification–performance relation by demonstrating a dark side of internationalization during a tail-risk event.

글로벌 시대 중국기업의 다각화와 경제성과에 관한 연구

본 연구는 2012년 중국체인점협회가 발표한 100개 중국 유통업체의 유통업계 내 사업 다각화, 지리적 다각화, 실적과의 관계에 초점이 맞춰져 있다. 본 연구의 결과는 다음과 같다. 업종 내 다각화를 시작할 때, 하나의 업종으로부터 사업을 확대함으로서 시너지 효과를 받을 수 있다. 업종 내 다각화 정도가 아주 높을 때, 보다 많은 유통 업태로 광범위하게 진출해서 과도한 투자가 된다. 지리적 다각화 정도가 증가함에 따라 Top 100유지율이 일부 감소 할 수는 있으나, 매출액은 증가 할 수 있다.

A Model Examining the Effect of Generative Learning on the Relationship between Diversification and Financial Performance

Organizations are trying to attain and sustain competitive advantage in the highly competitive business world settings. It is argued that one of the strategies to achieve competitive advantage is to form learning organizations. Diversification strategies of organizations are important growth decisions managers need to make. In this paper, organizational learning, learning organization, fundamental diversification strategies and the link between learning and diversification in the literature were discussed shortly. Then, the link between them was revisited considering the literature with a schema. At last, a causal model was introduced. Model suggested that When a company decides to expand its operations by adding new products related to existing product line, with the aim of exploiting its existing knowledge base, this company can reach superior financial performance (financial performance means profitability) through generative learning. When a company decides to grow by adding a new product line irrelevant to existing product lines, with the aim of exploring new knowledge, then through generative learning, this company can introduce or develop new technologies in forms of new products/services, in other words make innovation. Unrelated diversification does not directly provide high financial performance. But gradually, as the innovation gain awareness, it brings in superior financial performance more than related diversification can bring in.

The diversification–performance nexus: mediating role of information asymmetry

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.

How firm boundaries and relatedness jointly affect diversification value: trade-offs between governance and flexibility

Diversification involves ongoing decisions about firm boundaries and relatedness. We develop a theoretical model that uses a real-option framework combined with optimal mechanism design to analyze how choices of boundaries and relatedness affect firm performance in the face of tradeoffs between governance and flexibility. We find that: (1) optimal boundaries and relatedness are substitutes in determining firm performance; (2) the association between relatedness, the most commonly studied aspect of diversification, and firm performance is indeterminate; (3) the substitution between relatedness and boundaries declines as noise in internal communication increases; (4) variation in relatedness has greater impact than boundary size when headquarters can pick multiple winners; and (5) as the internal market for information becomes more efficient, the lower the value of relatedness in combination with small boundaries. The general conceptual implication of these points is that corporate governance interacts with firm relatedness and boundaries in generating diversification performance.

The Jury is Still Out On the Performance of Naive Diversification (1/N rule)

DeMiguel et. al. (2009b) made a compelling case that estimation error dwarfs diversification benefits resulting in naive diversification (1/N) dominating mean-variance portfolios. We illustrate the necessary and sufficient conditions for risk-based allocation rules to be optimal in a mean-variance framework. We show empirically that many common datasets satisfy such conditions, making these rules preferred to mean-variance in the presence of estimation error. Our out-of-sample tests show that these rules outperform both mean-variance and 1/N. Further, we show that clustering the data using machine learning enhances the diversification benefits of these rules by making the data closer to the required conditions for optimality.

Diversification and Fund Performance—An Analysis of Buyout Funds

This paper studies the relationship between portfolio diversification and fund performance, based on an unexplored, hand-collected dataset of buyout funds. The dataset comprises detailed information at the level of portfolio companies, which allows measuring the concentration of the fund portfolios towards individual companies, industrial, and geographical focus. Our results suggest that diversification within, but not across industries, associates with higher buyout fund performance. We do not find a significant relationship between geographical diversification and performance. These results partly contradict results documented in prior literature.

The scientific and technological cross-space: Is technological diversification driven by scientific endogenous capacity?

The principle of relatedness allows us to explore the likelihood that territories diversify their current technological portfolios based on the global co-occurrence patterns of technologies. Countries that excel at developing semiconductors should develop mobile phones because both technologies require similar endogenous capacities, including scientific knowledge. However, thus far, studies have been mostly limited to the knowledge common base assumption and have not questioned enough whether different scientific endogenous capacities may be behind similar diversification performances. To address this question, we introduce the concept of scientific and technological cross-density, which we define as the average proximity of a new potential technology to a country's scientific and technological portfolio. To conceptualize and measure the effect that scientific and technological cross-density may have on technological diversification, we applied a two-stage methodology to a sample of 182 countries during the 1988–2014 period. First, we build a network, the science and technology cross-space, (sci-tech cross-space), which relates knowledge and technologies based on co-occurrence values. Second, we estimate the effect of scientific-technological cross-density and technological density on technological diversification at the country level. We find that the more a new technology is related to a country's scientific portfolio, the greater its entry probability; additionally, the effect of technological density on technological diversification is greater than the effect of scientific and technological density.

Dynamics and determinants of export diversification in Brazil from 2003 to 2013

Abstract Brazil was successful in diversifying its export package from the 1960s to the beginning of the twenty-first century. However, this performance has been more ambiguous over the last decade. This study explores the literature on the impact of export diversification on economic growth and the determinants of successful diversification. More specifically, it analyzes the dynamics of Brazilian export diversification between 2003 and 2013. The results suggest that, overall, exports momentarily concentrated in 2004, 2008 and 2012, but rejoiced from a diversification spike in 2005. Southern and Southeastern states are found to have more diversified exports, but Central-West and Northeastern states have experienced higher diversification rates since 2006. Via a dynamic panel data analysis, using System General Methods of Moments estimation method, including all Brazilian states, past diversification performances, education, patents per capita, credits and public investments are found to be significant determinants of Brazilian export diversification.

What Drives Successful Economic Diversification in Resource-Rich Countries?

AbstractThe “resource curse” is often understood to imply poor growth in the non-resource sectors of the economy, but research into the diversification performance of resource-rich countries is limited. This paper surveys recent evidence and identifies empirical patterns in the economic diversification of resource-rich countries. Diversification is measured using the growth of per capita non-resource (manufacturing and services) sectors in domestic and export markets, which has a cleaner interpretation than competing measures. This measure is used to evaluate the long-term diversification of countries that started off as resource-dependent, and to rank countries according to their performance. We then identify policy-relevant correlates of diversification at the national level, including the acquisition of human capital, public and intellectual capital, and firm dynamism. More resource-dependent countries appear to perform worse on measures of human capital and intellectual capital, but more resource-abundant countries perform better on public capital and human capital accumulation. We examine the mechanisms behind diversification performance through in-depth case studies of Oman, Laos, and Indonesia, and conclude by identifying policy lessons and future research directions.

Sharia Banks Integration and Diversification in Asian and Middle East Countries

The growth of Sharia Banking in Indonesia shows that Sharia banking in Indonesia is not only an international hub for Sharia banking in other regions but also as a place for investors to diversify investment portfolios other than conventional banking. The certainty of Sharia banking in term of stability makes Sharia Banking in Indonesia connected to one another. However, opportunities for portfolio diversification to Sharia banks in this case; Indonesia, Malaysia, India, Qatar, Bahrain and Japan are in questioned on whether there is integration between Sharia banking in those region and whether there is a possibility of Diversification of Sharia banking Portfolios in the region. In this manner the study is analysed on 25 banks' data across selected countries. In the present study, ROA (Return on Assets) and ROE (Return on Equity) are used as measure of performance of diversification of banks. The number of credits and the amount of credits that Sharia banks let borrowers' use are employed as control variables. According to the result of the analysis showed Indonesia Sharia banks Integration with another Sharia banks in selected countries are varied based the geographical proximity and bilateral trading relation with selected countries.

Dynamic process: international diversification and innovation performance from emerging economies

ABSTRACT Drawing upon the transaction cost economics and organizational learning theory, this study examines how international diversification affects firm's innovation performance. With a longitudinal data set obtained from a sample of 73 Chinese firms in information communication equipment manufacturing industry, home appliances manufacturing industry, and low voltage apparatus and cable manufacturing industry, we find a curvilinear inverted S-shaped relationship between international diversification and innovation performance. It implies that emerging enterprises might gain increase at the expansion stage, experience a hard time at the conflict stage, and then reap again at the convergence phase.

Diversification Expansion Strategies and Performance of Savings and Credit Co-Operative Societies in Turkana County, Kenya

Studies in the Savings and Credit Co-Operative Societies (SACCOs) sector have recently received a lot of attentions globally and locally. The SACCOs have experienced growth and diversification in the range of products and services in the market. The purpose of this study was to establish the effect of expansion strategies and performance of SACCOs in Turkana County, Kenya. The study sought to establish the effect of diversification expansion strategies on performance of SACCOs. The study was anchored on the Resource Based Theory and Igor Ansoff’s Theory. The research designs of the study were descriptive and correlational research designs. Target population was 234 respondents consisting of thirty-five (35) SACCOs managers and 199 Secretariat drawn from the 35 SACCOs in Turkana County. Purposive and stratified sampling techniques were used. The questionnaire was used as the data collection instrument. This study employed the Cronbach’s alpha coefficient as a measure of reliability of research instruments at threshold of 0.7 and above. The study used construct validity of the instruments, and content validity to make structured changes for the purpose of improvement and refinement before embarking on the actual data collection process. Data analysis and interpretation was based on descriptive statistics as well as inferential statistics using SPSS version 22. Results of the study were that: diversification expansion strategies had a positive, linear and significant (p-value is less than 0.05) association with the performance of SACCOs. Diversification expansion strategies had 53.9% variations on the performance of SACCOs. It was concluded that as the company invests more and implements diversification expansion strategies, the performance of SACCOs would improve. Results showed that diversification expansion strategies were more implemented had more effect on performance of SACCOs than expansion strategies. It was recommended that the management of SACCOs should inv

Canonical correlation analysis of the impact of ICT on the diversification performance

The main objective of this study was to establish the relationship between the use of information and communication technologies (ICT) and the performance of business diversification within a sample of companies belonging to the autonomous community of the Basque country. For this, a canonical correlation analysis (CCA) was performed, taking the coefficients to explain the variance of the two sets of variables. It can be affirmed that the ICT of general use, of electronic commerce and of relationship impact in the elements that compose the performance of the diversified company.

Canonical correlation analysis of the impact of ICT on the diversification performance

The main objective of this study was to establish the relationship between the use of information and communication technologies (ICT) and the performance of business diversification within a sample of companies belonging to the autonomous community of the Basque country. For this, a canonical correlation analysis (CCA) was performed, taking the coefficients to explain the variance of the two sets of variables. It can be affirmed that the ICT of general use, of electronic commerce and of relationship impact in the elements that compose the performance of the diversified company.

What Drives Successful Economic Diversification in Resource-Rich Countries?

The ‘resource curse’ is often understood to imply poor growth in the non-resource sectors of the economy, but research into the diversification performance of resource-rich countries is limited. This paper surveys recent evidence and identifies empirical patterns in the economic diversification of resource-rich countries. Diversification is measured using the growth of per capita non-resource (manufacturing and services) sectors in domestic and export markets, which has a cleaner interpretation than competing measures. This measure is used to evaluate the long-term diversification of countries that started off as resource-dependent, and to rank countries according to their performance. We then identify policy-relevant correlates of diversification at the national level, including the acquisition of human capital, public and intellectual capital, and firm dynamism. More resource-dependent countries appear to perform worse on measures of human capital and intellectual capital, but more resource-abundant countries perform better on public capital and human capital accumulation. We examine the mechanisms behind diversification performance through in-depth case studies of Oman, Laos and Indonesia, and conclude by identifying policy lessons and future research directions.

Economic Benefits of Waste Management Based on Cocoa Farming System in Rural Area: Evidence from East Kolaka District of Southeast Sulawesi Province

Indonesia is the three largest countries producing cocoa in the world. However, the productivity tends to be slow down, which cause concern income generation for smallholder farmers across the county. This study deals with the performance of diversification based on creating cocoa by product and waste management of livestock integrated farming in order to increasing household income due to low productivity. This research covers more than 120 household farmers as the respondent through the survey by using questionnaire in three districts population sample. The results of this study indicate that the response of farmers in this study location those are introduced technology components shows effective value. This shows a positive support for the results of this study. The results of the cost and feasibility analysis of the business of making solid organic fertilizers, processing cocoa beans and making bio-char or biological charcoal of cocoa pod show those businesses can be a pattern of diversification of farm household income in the small scale concept. The household scale model of this study development through the zero waste concepts applied at the study site is expected to be a recommendation for the local government in an effort to improve the welfare of cocoa farmer households in this region.

Impacto de la estrategia de diversificación en el desempeño financiero en empresas de la Bolsa Mexicana de Valores

El presente trabajo de investigación tiene como objetivo analizar el impacto de la diversificación mediante las métricas Herfindahl y Entropía en el desempeño financiero (EBITDA y Q-Tobins). La información fue obtenida a través de fuentes secundaras correspondientes a 133 empresas de la Bolsa Mexicana de Valores durante el periodo 2011 – 2016, sometiéndose a un análisis cuantitativo mediante la técnica de datos de panel. Los resultados muestran que las métricas de diversificación utilizadas resultan significativas cuando el desempeño es medido a través del EBITDA. El EBITDA puede ser una métrica utilizada para medir el desempeño de la estrategia en las empresas. Siendo la principal limitación es el acceso a la información financiera de los productos ofertados. Esta investigación propone el EBITDA como métrica de medición del desempeño financiero en un contexto de diversificación en países emergentes. Finalmente, se concluye con el efecto positivo y significativo de la métrica Herfindahl, mostrando que el EBITDA tiene mejor resultado al medir el desempeño de la diversificación que la Q-Tobins.