Does the Diversification–Firm Performance Relationship Change Over Time? A Meta‐Analytical Review

• Author: Monika Schommer,Amit Karna,Ansgar Richter
• Date: 01 January 2019
• DOI: http://doi.org/10.1111/joms.12393
• Published date: 01 January 2019

Does the Diversification–Firm Performance Relationship

Change Over Time? A Meta-Analytical Review

Monika Schommer, Ansgar Richter and Amit Karna

EBS University of Business and Law;University of Sur rey; Indian Institute of Management

Ahmedabad

ABST RACT We study the relationship bet ween diversification and f irm performance in the

context of the decline in level s of diversification over time. We arg ue that the pressu re to

reduce diversif ication may have more strongly affected those f irms whose diversif ication

strategies were most detr imental to firm perfor mance. We employ meta-analy tical regression

(MA RA) in order to test our hypotheses, usi ng a total of 267 primary studies cont aining 387

effect sizes base d on 150,000 f irm-level observations from over 60 yea rs of research on the

diversif ication–firm perform ance relationship. The find ings suggest that levels of unrelated

diversif ication have decreased, whereas levels of related diver sification have increased sinc e the

mid-1990s, following a n initial decrease in the 1970s and 1980s. Fur thermore, we find that the

relationship bet ween unrelated diversificat ion and firm performance ha s improved signifi-

cantly over time, whereas t he relationship between related divers ification and performance ha s

remained r elatively stable.

Keywo rds: divers ification, corporate refocu sing, firm perfor mance, meta-analysis

A widely shared view in t he strategic management literature that has permeated leadi ng

textbooks on corporate strateg y (Hitt et al., 2017; Johnson et al., 2008) holds that the re-

lationship between corporate divers ification and fir m performance is inverted U-shaped

(Pierce and Aguinis, 2013; Rumelt, 1974). According to this view, small diversif ication

steps, in particular into lines of business that are related to a firm’s existing one(s), tend

to have benefits (e.g., from sharing factors across different business lines) that outweigh

their disadvantages. However, as firms diversify into further and less related lines of

business, the marginal benefits of doing so decline and the marginal costs increase,

such that above its optimal level the effects of diversification on performance begin to

Journal of Man agement Studi es 56:1 January 2019

doi: 10.1111/jom s.123 93

Address for repr ints: Ansg ar Richter, Surrey Business School , University of Sur rey, Rik Medl ik Build ing,

Guildford, Su rrey, GU2 7XH, United Kingdom (a.r ichter@surrey.ac.uk).

This is an op en access article under the t erms of the Creative Commons At tribution License, which

permits use, d istribution and reproduct ion in any medium, provided the or iginal work is properly cite d.

© 2018 The Authors

Journal of Ma nagement Studies publ ished by John Wiley & Sons L td and Society for

the Advanceme nt of Management Studies

A Meta-Analytical Review 271

© 2018 The Authors Journa l of Management Stud ies published by John Wiley & S ons Ltd and Society for t he

Advancement of Management Studies

turn negative (Markides, 1995).1 A large number of empirical studies, including several

meta-analyses, have attested to this view (e.g., Palich et al., 2000).

Little is known, however, about the effects of the ‘refocusing’ that is reported to

have taken place in recent decades (Bergh et al., 2008) on the nature of the diversi-

fication–firm performance relationship. According to agency-theoretic (e.g., Kogut et

al., 1992; Montgomery, 1994) and institutional (e.g., Lee et al., 2008; Wan, 2005; Wan

and Hoskisson, 2003) perspectives, increasing shareholder power, a more active market

for corporate control, and a liberalized market environment have curbed the ability of

managers to pursue potentially value-destroying conglomeration strategies. These de-

velopments have led to the ‘de-institutionalization’ of the conglomerate form in the late

1980s and early 1990s in the US (Davis et al., 1994; Fligstein and Markowitz, 1993;

Lichtenberg, 1992). In some other Western countries, a trend towards de-diversification

also appears to have taken place (Whittington and Mayer, 2000), albeit at a slower pace.

With respect to emerging economies, the picture is less clear. Lee et al. (2008) and Peng

et al. (2005) argued that with increasing institutional development, the relative benefits of

diversification have decreased, and its relative costs increased. Some studies have found

that, as a result, aggregate levels of diversification among emerging market firms have

decreased (Hoskisson et al., 2005). At the same time, diversification continues to be an

important strategy for many companies in markets such as India (Ramachandran et al.,

2013) and others.

Much of the empirical evidence on diversification is based on data gathered during

the 1980s and 1990s. However, there is little evidence on whether the trend away from

diversification that appears to have taken place during that time has continued since

then. The number of studies that have investigated long-term trends in diversification

(over several decades) is relatively small. There is thus value in aggregating what is known

from primary, cross-sectional ‘snapshots’ of levels of diversification, and mapping them

over time. Furthermore, many of the extant studies on changes in diversification do not

distinguish between related and unrelated diversification.

Against this background, our paper makes two contributions to the literature on cor-

porate diversification. First, we analyse the development of diversification over time,

distinguishing between related and unrelated forms of diversification. Our study is more

nuanced than extant research, by showing that the trends in related and unrelated di-

versification have been different. We apply meta-analysis in order to aggregate studies

on diversification, and model these data as a function of time. Our study covers over

60 years of research, a longer time period than any other quantitative study on levels of

diversification.

Second, we investigate shifts in the diversification–performance relationship in the

context of the changes in levels of diversification over time. This research interest is

not merely an exploratory one, but has important theoretical implications. Specifically,

authors including Mackey et al. (2017) have argued that the capacity to manage diversi-

fication is heterogeneously distributed across firms. They thus conceive the performance

effects of diversification not as an absolute value, as does the discussion about the di-

versification discount or premium in the finance literature (Campa and Kedia, 2002;

Kuppuswamy and Villalonga, 2010; Rajan et al., 2000), but rather as a variable that