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Firm size and unrelated diversification. An empirical test on the ‘survivalist hypothesis’

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  • Enrico Guzzini

    ()
    (Università degli Studi e-Campus, Italy)

  • Donato Iacobucci

    ()
    (Dept. of Information Engineering Università Politecnica delle Marche, Italy)

Abstract

The aim of this paper is to empirically verify the hypothesis of a U shaped relation between size and unrelated diversification. Specifically we test the so called “survivalist hypothesis” according to which unrelated diversification is observed not only in large firms but also in small firms as a result of poor performance in the initial business. We empirically test this hypothesis using a representative sample of Italian business groups. The empirical results confirm the presence of a U shaped relation between size and unrelated diversification. Small groups are more diversified than medium-sized groups. We think that this is an interesting result, since according to traditional theories of diversification (resource based view and agency view) we should expect a linear and positive relation between size and unrelated diversification. The second novelty of the paper is that of considering the group rather than the single legal entity as unit of analysis. This is specifically appropriate in this case as unrelated diversification is often carried out by setting-up or acquiring new companies.

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File URL: http://193.205.129.80/repec/cme/wpaper/cmetwp_07_2012.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by c.MET-05 - Centro interuniversitario di Economia Applicata alle Politiche per L'industria, lo Sviluppo locale e l'Internazionalizzazione in its series Working Papers with number 1207.

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Length: 17 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:cme:wpaper:1207

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Web page: http://www.cmet.it
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Keywords: diversification; firm size; business groups;

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  1. Denis, David J & Denis, Diane K & Sarin, Atulya, 1997. " Agency Problems, Equity Ownership, and Corporate Diversification," Journal of Finance, American Finance Association, American Finance Association, vol. 52(1), pages 135-60, March.
  2. Bianco, Magda & Nicodano, Giovanna, 2006. "Pyramidal groups and debt," European Economic Review, Elsevier, Elsevier, vol. 50(4), pages 937-961, May.
  3. Teece, David J. & Rumelt, Richard & Dosi, Giovanni & Winter, Sidney, 1994. "Understanding corporate coherence : Theory and evidence," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 23(1), pages 1-30, January.
  4. Donato Iacobucci, 2002. "Explaining business groups started by habitual entrepreneurs in the Italian manufacturing sector," Entrepreneurship & Regional Development, Taylor & Francis Journals, Taylor & Francis Journals, vol. 14(1), pages 31-47, January.
  5. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 323-29, May.
  6. Pavitt, Keith, 1984. "Sectoral patterns of technical change: Towards a taxonomy and a theory," Research Policy, Elsevier, Elsevier, vol. 13(6), pages 343-373, December.
  7. Dass, Parshotam, 2000. "Relationship of Firm Size, Initial Diversification, and Internationalization with Strategic Change," Journal of Business Research, Elsevier, Elsevier, vol. 48(2), pages 135-146, May.
  8. Jacquemin, Alexis P & Berry, Charles H, 1979. "Entropy Measure of Diversification and Corporate Growth," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 27(4), pages 359-69, June.
  9. P Rosa & M Scott, 1999. "Entrepreneurial diversification, business-cluster formation, and growth," Environment and Planning C: Government and Policy, Pion Ltd, London, Pion Ltd, London, vol. 17(5), pages 527-547, October.
  10. Heitor V. Almeida & Daniel Wolfenzon, 2006. "A Theory of Pyramidal Ownership and Family Business Groups," Journal of Finance, American Finance Association, American Finance Association, vol. 61(6), pages 2637-2680, December.
  11. Martin, John D. & Sayrak, Akin, 2003. "Corporate diversification and shareholder value: a survey of recent literature," Journal of Corporate Finance, Elsevier, Elsevier, vol. 9(1), pages 37-57, January.
  12. Donato Iacobucci & Peter Rosa, 2005. "Growth, Diversification, and Business Group Formation in Entrepreneurial Firms," Small Business Economics, Springer, Springer, vol. 25(1), pages 65-82, 08.
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