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Organizational Learning and Corporate Diversification Performance

59 Pages Posted: 4 Oct 2010 Last revised: 2 Apr 2016

Panayiotis C. Andreou

Cyprus University of Technology

Christodoulos Louca

Cyprus University of Technology

Andreas Petrou

Cyprus University of Technology

Date Written: December 14, 2014

Abstract

This study investigates the role of organizational learning on the valuation effects of corporate diversification. The empirical findings suggest that corporate diversification reduces shareholders’ wealth. However, consistent with the absorptive capacity viewpoint of organizational learning, diversification performance depends on repetitive and accumulative experiences, as captured by a firm’s prior diversification activity and/or a firm’s experience in operating in multiple-business segments. Specifically, single-business firms that diversify once demonstrate significant value reduction. In contrast, multi-business firms that diversify once do not demonstrate value reduction, while single/multi-business firms that diversify multiple times demonstrate material value creation. Findings also reveal that performance is conditional on the mode of diversification since internal growth diversification show higher valuation effects than diversifications through acquisitions. These findings contribute to the literature by affirming the importance of organizational learning, a cognitive and behavioral perspective, in explaining the valuation effect of corporate diversification.

Keywords: organizational learning, absorptive capacity, diversification, repetitive experience, accumulative experience, diversification discount, firm performance

JEL Classification: L25, G34

Suggested Citation

Andreou, Panayiotis C. and Louca, Christodoulos and Petrou, Andreas, Organizational Learning and Corporate Diversification Performance (December 14, 2014). Journal of Business Research, 2016. Available at SSRN: https://ssrn.com/abstract=1686776 or http://dx.doi.org/10.2139/ssrn.1686776

Panayiotis Andreou

Cyprus University of Technology ( email )

School Of Management and Economics
P.O. Box 50329
Lemesos, 3036
Cyprus

HOME PAGE: http://www.pandreou.com

Christodoulos Louca (Contact Author)

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

Andreas Petrou

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

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