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The Effect of Diversification on Firm Performance

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Author Info

  • Mark Rogers

    (Harris Manchester College, The University of Oxford and Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

Abstract

This paper analyses the association between diversification and firm performance in a sample of up to 1449 large Australian firms (1994 to 1997). Firm performance is measured by profitability and, for quoted firms, market value. Results from the full sample show that more focused firms have higher profitability. This result controls for firm specific effects and other determinants of profitability. However, this association is not found in sub-sample regressions for listed firms. This is true both when either profitability or market value are used as a performance measure. The results may indicate that listed firms may be under closer scrutiny and competitive pressures that ensure, on average, that these firms are at their optimal degree of diversification.

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Bibliographic Info

Paper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2001n02.

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Length: 32 pages
Date of creation: May 2001
Date of revision:
Handle: RePEc:iae:iaewps:wp2001n02

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Postal: Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia
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Web page: http://www.melbourneinstitute.com/
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  1. Scott,John T., 2005. "Purposive Diversification and Economic Performance," Cambridge Books, Cambridge University Press, number 9780521022583, October.
  2. Hall, B.H., 1999. "Innovation and Market Value," Economics Papers 1999-w3, Economics Group, Nuffield College, University of Oxford.
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  4. Christopher Kenneth Bart, 1998. "The Relationship Between Mission Statements and Firm Performance: An Exploratory Study," Journal of Management Studies, Wiley Blackwell, vol. 35(6), pages 823-853, November.
  5. Zvi Griliches, 1984. "Market Value, R&D, and Patents," NBER Chapters, in: R & D, Patents, and Productivity, pages 249-252 National Bureau of Economic Research, Inc.
  6. Himmelberg, Charles P. & Hubbard, R. Glenn & Palia, Darius, 1999. "Understanding the determinants of managerial ownership and the link between ownership and performance," Journal of Financial Economics, Elsevier, vol. 53(3), pages 353-384, September.
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  8. McDonald, James Ted, 1999. "The Determinants of Firm Profitability in Australian Manufacturing," The Economic Record, The Economic Society of Australia, vol. 75(229), pages 115-26, June.
  9. Geroski, Paul A & Jacquemin, Alexis, 1988. "The Persistence of Profits: A European Comparison," Economic Journal, Royal Economic Society, vol. 98(391), pages 375-89, June.
  10. Larry H.P. Lang & Rene M. Stulz, 1993. "Tobin's Q, Corporate Diversification and Firm Performance," NBER Working Papers 4376, National Bureau of Economic Research, Inc.
  11. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211.
  12. Cockburn, Iain & Griliches, Zvi, 1988. "Industry Effects and Appropriability Measures in the Stock Market's Valuation of R&D and Patents," American Economic Review, American Economic Association, vol. 78(2), pages 419-23, May.
  13. Dess, G. & Gupta, A. & Hennart, J.-F. & Hill, C., 1995. "Conducting and integrating strategy research at the international, corporate, and business levels : issues and directions," Open Access publications from Tilburg University urn:nbn:nl:ui:12-174007, Tilburg University.
  14. Teece, David J., 1982. "Towards an economic theory of the multiproduct firm," Journal of Economic Behavior & Organization, Elsevier, vol. 3(1), pages 39-63, March.
  15. Michael Gort, 1962. "Diversification and Integration in American Industry," NBER Books, National Bureau of Economic Research, Inc, number gort62-1, May.
  16. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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Cited by:
  1. Christian Espinosa & Carlos Maquieira, 2010. "Diversificación y Desempeño en Sud América: Evidencia para Chile," Working Papers 10, Facultad de Economía y Empresa, Universidad Diego Portales.

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