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Risk/Return Performance of Diversified Firms

Author

Listed:
  • 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)

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.

Suggested Citation

  • Richard A. Bettis & Vijay Mahajan, 1985. "Risk/Return Performance of Diversified Firms," Management Science, INFORMS, vol. 31(7), pages 785-799, July.
  • Handle: RePEc:inm:ormnsc:v:31:y:1985:i:7:p:785-799
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    File URL: http://dx.doi.org/10.1287/mnsc.31.7.785
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    References listed on IDEAS

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    1. Ian I. Mitroff, 1972. "The Myth of Objectivity OR Why Science Needs a New Psychology of Science," Management Science, INFORMS, vol. 18(10), pages 613-618, June.
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    Cited by:

    1. 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.
    2. Will, Matthias Georg, 2012. "Erfolgreicher organisatorischer Wandel durch die Überwindung von Risiken: Eine interaktionstheoretische Perspektive," Discussion Papers 2012-19, Martin Luther University of Halle-Wittenberg, Chair of Economic Ethics.
    3. 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.
    4. 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.
    5. 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.
    6. Ramanathan, Ramakrishnan & Ramanathan, Usha & Zhang, Yubo, 2016. "Linking operations, marketing and environmental capabilities and diversification to hotel performance: A data envelopment analysis approach," International Journal of Production Economics, Elsevier, vol. 176(C), pages 111-122.
    7. Palich, Leslie E. & Carini, Gary R. & Seaman, Samuel L., 2000. "The Impact of Internationalization on the Diversification-Performance Relationship: A Replication and Extension of Prior Research," Journal of Business Research, Elsevier, vol. 48(1), pages 43-54, April.
    8. 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.
    9. repec:kap:rqfnac:v:49:y:2017:i:4:d:10.1007_s11156-017-0616-2 is not listed on IDEAS
    10. Nickel, Manuel Núñez & Rodriguez, Manuel Cano, 2002. "A review of research on the negative accounting relationship between risk and return: Bowman's paradox," Omega, Elsevier, vol. 30(1), pages 1-18, February.
    11. 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.
    12. Hasan, Iftekhar & Kobeissi, Nada & Liu, Liuling & Wang, Haizhi, 2016. "Corporate social responsibility and firm financial performance: the mediating role of productivity," Research Discussion Papers 7/2016, Bank of Finland.
    13. 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.
    14. Alonso-Borrego, César & Forcadell, Francisco Javier, 2010. "Related diversification and R&D intensity dynamics," Research Policy, Elsevier, vol. 39(4), pages 537-548, May.
    15. 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.
    16. POLLIFRONI Massimo & MILITARU Gheorghe & IOANA Adrian, 2016. ""Diversity Management" Towards "Diversity Engagement": The New Key Drivers For The Corporate Performances," Revista Economica, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 68(3), pages 127-141, December.
    17. Koch, James & Cebula, Richard, 1993. "In Search of Excellent Management," MPRA Paper 50196, University Library of Munich, Germany.
    18. 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.
    19. 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.
    20. Mudambi, Ram, 1999. "MNE internal capital markets and subsidiary strategic independence," International Business Review, Elsevier, vol. 8(2), pages 197-211, April.
    21. Mudambi, Ram & Swift, Tim, 2011. "Proactive R&D management and firm growth: A punctuated equilibrium model," Research Policy, Elsevier, vol. 40(3), pages 429-440, April.
    22. Michael Doumpos & Chrysovalantis Gaganis & Fotios Pasiouras, 2016. "Bank Diversification and Overall Financial Strength: International Evidence," Working Papers 1602, University of Crete, Department of Economics.
    23. Piaskowska, D., 2005. "Essays on firm growth and value creation," Other publications TiSEM 89053610-79c6-4c52-9d1c-6, Tilburg University, School of Economics and Management.

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    Keywords

    planning/corporate;

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