Abstract
Diversification in – mostly public – corporations has been subject to academic research for decades and has found its place in academic literature in multiple disciplines. Along with such concepts as synergies, distinctive competences, and generic strategies, the diversification theme is furthermore commonly acknowledged as one of the key drivers of the strategic management discipline (Ramanujam & Varadarajan, 1989: 523). This chapter is supposed to (a) establish an understanding of the definition of diversification used in academic literature, (b) give a summary of the different streams of research including a general overview of different research areas and the key learnings from predominant research and leading publications as well as (c) provide a detailed analysis of relevant theories and literature in the two focus areas and research objectives of this dissertation – “Diversification and Performance” and “Managing Diversified Portfolios”.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
The term ‘conglomerate’ is commonly used as a synonym for unrelated-diversified firms, mostly used in media and commercially-oriented publications while academia generally uses the term ‘unrelated-diversified’. The term ‘multi-business firm’ is a synonym for related- and unrelated-diversified firms used to group all diversified firms together when contrasted to focused/single-business firms.
- 2.
Ramanujam and Varadarajan’s contribution provides a very detailed overview of relevant literature originated between 1962 and the end of the 1980s. The granular structure furthermore allows to cluster most publications of more recent research.
- 3.
See Markham’s (1973) seminal contribution “Conglomerate Enterprise and Public Policy” for a thorough review of the theoretical foundations and shortfalls of the market-power view and its effect on public policy.
- 4.
The ‘free cash-flow theory’ will be investigate in further detail during the outline of the rationale behind the leveraged buyout association in Section 3.2.1 ‘Key Characteristics of Leveraged Buyouts’.
- 5.
Business risk refers to the implied volatilities in earnings associated with firms invested in a single business. Originally, risk reduction has been another important justification for diversification. Investors were given the opportunity to invest in a portfolio of assets rather than buy stocks of single-business firms (Levy and Sarnat 1970). Today, however, this belief has deteriorated with the rise of highly efficient, liquid capital markets. According to capital market theory, investors can diversify away business risk themselves and can hereby achieve their desired level of risk while being better equipped to changes in the market environment. Even when market imperfections such as transaction costs are admitted, the risk-reduction benefits in diversified firms seem highly questionable given the relatively low cost of portfolio diversification in capital markets (Amihud and Lev 1981: 615). Thus, managers should not be concerned with reducing their firm-specific business risk (Amit and Wernerfelt 1990; Markides 1995).
- 6.
The resource-based view will be of particular interest in the discussion of corporate involvement in the leverage of resources across different businesses and will be covered in further detail in Section 2.4.3 ‘Leverage of Resources and Competences across Businesses’.
- 7.
Varadarajan uses a SIC-Code classification for business segments (4-digit SIC code level) and industry groups (2-digit SIC code level) based on the segmental reporting of firms in their annual reports.
- 8.
This section is supposed to provide a general overview of the academic literature in the field of diversification. As one of the key research objectives of this dissertation, the literature review regarding the management of multi-business firms will be further detailed in Section 2.4 ‘Managing Diversified Portfolios’.
- 9.
This section is supposed to provide a general overview of the academic literature in the field of diversification. As one of the key research objectives of this dissertation, the literature review regarding the impact of diversification on the performance of multi-business firms will be further detailed in Section 2.3 ‘Diversification and Performance’.
- 10.
The measures for the level of diversification are comparable in both research direction and are illustrated in Section 2.3.1 ‘Measure of Diversification’.
- 11.
Rumelt’s (1974) sample comprises 273 corporations from the US Fortune 500. It consists of a random sample selected from the top 500 firms in the US between 1949 and 1974.
- 12.
One of the major shortcomings of most studies is their failure to correct for the fact that many firms trading at a discount have been already trading at a discount prior to diversifying. For further detail see Lang/Stulz (1994), Campa/Kedia (2002), or Martin/Sayrak (2003).
- 13.
Additionally, there has been a growing number of so-called event studies, which investigate the reactions of capital markets to a firms decision to diversify or to focus such as Comment/Jarrell (1995) and Dittmar/Shivdasani (2003). They have been excluded from the overview due to the prior definition of diversification for this study along status rather than process of diversification and neither results nor methodology would contribute to the further proceeding of this study. See Montgomery (1994) for an overview of the results generated in selected event studies.
- 14.
Lang and Stulz (1994) argue that the use of capital market indicators insufficiently explains the cross-section of expected returns. This however only applies to event studies that are examining the diversification process of firms. This does not apply to studies investigating the status of diversification and therefore the long-term risk-adjusted performance of a company.
- 15.
Hitt and Ireland (1986) distinguish the following competences on the corporate level: General administration, production/operations, engineering/research and development, marketing, finance, personnel/human resources, public/governmental relations.
- 16.
Slater/Zwirlein (1992) provide evidence, that diversification strategies built on matrix portfolio analysis are associated with value destroying investments. This observation holds true across different matrix concepts as well as risk-adjusted and market adjusted measures of return to shareholders.
- 17.
Reallocation of funds can include the transfer of cash flow from one division to the other as well as the use of one division’s assets as collateral to raise financing that is then diverted to another division.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
Copyright information
© 2009 Physica-Verlag Heidelberg
About this chapter
Cite this chapter
Klier, D.O. (2009). Diversification in Corporations. In: Managing Diversified Portfolios. Contributions to Management Science. Physica, Heidelberg. https://doi.org/10.1007/978-3-7908-2173-4_2
Download citation
DOI: https://doi.org/10.1007/978-3-7908-2173-4_2
Published:
Publisher Name: Physica, Heidelberg
Print ISBN: 978-3-7908-2172-7
Online ISBN: 978-3-7908-2173-4
eBook Packages: Business and EconomicsBusiness and Management (R0)