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The impact of diversification strategy on risk‐return performance

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  • Yegmin Chang
  • Howard Thomas

Abstract

This study examines the impact of diversification strategy on risk and return in diversified firms. Following an assessment of previous research on strategic risk, relationships between risk, return, and diversification strategy are hypothesized. Regression analysis shows that differences in risk‐return performance among diversified firms are more closely associated with structural factors associated with markets and businesses than with the particular diversification strategy chosen. Returns also influence the choice of diversification strategles which, in turn, do not get rewarded with higher profits. A curvilinear risk‐return relationship is also observed which is consistent with previous theoretical suggestions. Implications for the strategic management of risk are then drawn.

Suggested Citation

  • Yegmin Chang & Howard Thomas, 1989. "The impact of diversification strategy on risk‐return performance," Strategic Management Journal, Wiley Blackwell, vol. 10(3), pages 271-284, May.
    • Handle: RePEc:bla:stratm:v:10:y:1989:i:3:p:271-284
    DOI: 10.1002/smj.4250100306
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    Cited by:

    1. DRAGHICI, Dalis Maria, 2021. "Implementing Quantitative Techniques In Assessing The Risk Attitudes," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 25(2), pages 64-78, June.
    2. Viswanathan Nagarajan & Pitabas Mohanty & Apalak Khatua, 2023. "Financing effects of corporate diversification: A review," Review of Managerial Science, Springer, vol. 17(7), pages 2555-2585, October.
    3. Chien-Nan Chen & Chengli Tien & Bernard Gan, 2019. "The postentry performance of business groups’ new venture affiliates," Australian Journal of Management, Australian School of Business, vol. 44(2), pages 325-343, May.
    4. DasGupta, Ranjan & Deb, Soumya G., 2022. "Role of corporate governance in moderating the risk-return paradox: Cross country evidence," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(2).
    5. Kien S. Nguyen, 2020. "Volatility and Specific Risk Toward Family’s Performance in an Emerging Country," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 27(3), pages 363-386, September.
    6. Xue-Feng Shao & Kostas Gouliamos & Ben Nan-Feng Luo & Shigeyuki Hamori & Stephen Satchell & Xiao-Guang Yue & Jane Qiu, 2020. "Diversification and Desynchronicity: An Organizational Portfolio Perspective on Corporate Risk Reduction," Risks, MDPI, vol. 8(2), pages 1-16, May.
    7. Joo, M. Hashemi & Parhizgari, A.M., 2021. "A behavioral explanation of credit ratings and leverage adjustments," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).

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