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Risk/Return Performance of Diversified Firms

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  • Richard A. Bettis

    (Edwin L. Cox School of Business, Southern Methodist University, Dallas, Texas 75275)

  • Vijay Mahajan

    (Edwin L. Cox School of Business, Southern Methodist University, Dallas, Texas 75275)

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    Abstract

    Based on a sample of 80 firms, this paper examines the risk/return performance of related and unrelated diversified firms at the level of accounting data. The results suggest that although on the average related diversified firms outperform unrelated diversified firms, related diversification offers no guarantee of a favorable risk/return performance. (Many low performers are related diversifiers.) In fact, different diversification strategies can result in similar risk/return performance. However, a favorable risk/return performance is extremely hard to achieve with unrelated diversification. The study identifies diversified firms that have managed to simultaneously reduced risks and increase returns. The results indicate that these firms differ from other firms on some managerially useful dimensions. The differences suggest clues to guide other diversified firms to improve their risk/return performance.

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    File URL: http://dx.doi.org/10.1287/mnsc.31.7.785
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 31 (1985)
    Issue (Month): 7 (July)
    Pages: 785-799

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    Handle: RePEc:inm:ormnsc:v:31:y:1985:i:7:p:785-799

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    Keywords: planning/corporate;

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    Cited by:
    1. Elango, B., 2010. "Influence of industry type on the relationship between international operations and risk," Journal of Business Research, Elsevier, vol. 63(3), pages 303-309, March.
    2. Fok, Robert C. W. & Carroll, Carolyn & Chiou, Ming C., 1997. "Determinants of corporate hedging and derivatives: A revisit," Journal of Economics and Business, Elsevier, vol. 49(6), pages 569-585.
    3. Clercq, Dirk De & Menguc, Bulent & Auh, Seigyoung, 2009. "Unpacking the relationship between an innovation strategy and firm performance: The role of task conflict and political activity," Journal of Business Research, Elsevier, vol. 62(11), pages 1046-1053, November.
    4. Mudambi, Ram, 1999. "MNE internal capital markets and subsidiary strategic independence," International Business Review, Elsevier, vol. 8(2), pages 197-211, April.
    5. Ding, John Y. & Caswell, Julie A., 1991. "A FRAMEWORK FOR ANALYSIS OF ALTERNATIVE RESTRUCTURING STRATEGIES EMPWYED BY LARGE FOOD MANUFACTURERS IN THE 1980s," Working Papers 116101, Regional Research Project NE-165 Private Strategies, Public Policies, and Food System Performance.
    6. Dass, Parshotam, 2000. "Relationship of Firm Size, Initial Diversification, and Internationalization with Strategic Change," Journal of Business Research, Elsevier, vol. 48(2), pages 135-146, May.
    7. Riahi-Belkaoui, Ahmed, 1996. "Internationalization, diversification strategy and ownership structure: Implications for French MNE performance," International Business Review, Elsevier, vol. 5(4), pages 367-376, August.
    8. Lun, Y.H. Venus & Browne, Michael & Lai, Kee-hung & Wong, Christina W.Y. & Cheng, T.C.E., 2011. "Examining the influence of firm performance on business risk-taking and the mediation effect of scale of operations in the container terminal industry," Research in Transportation Economics, Elsevier, vol. 32(1), pages 64-70.
    9. Dellestrand, Henrik & Kappen, Philip, 2011. "Headquarters Allocation of Resources to Innovation Transfer Projects within the Multinational Enterprise," Journal of International Management, Elsevier, vol. 17(4), pages 263-277.
    10. Koch, James & Cebula, Richard, 1993. "In Search of Excellent Management," MPRA Paper 50196, University Library of Munich, Germany.
    11. Veliyath, Rajaram & Ferris, Stephen P., 1997. "Agency influences on risk reduction and operating performance: An empirical investigation among strategic groups," Journal of Business Research, Elsevier, vol. 39(3), pages 219-230, July.
    12. Hutzschenreuter, Thomas & Horstkotte, Julian, 2013. "Performance effects of international expansion processes: The moderating role of top management team experiences," International Business Review, Elsevier, vol. 22(1), pages 259-277.

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