Individual and Joint Performance Effects of Diversification, Geographic Scope and Organizational Leverage in Professional Service Firms: A Study of German Law Firms

42 Pages Posted: 31 Jan 2014

See all articles by Amit Karna

Amit Karna

EBS Universität für Wirtschaft und Recht - EBS Business School

Ansgar Richter

University of Liverpool - Management School (ULMS)

Monika Schommer

EBS Universität für Wirtschaft und Recht - EBS Business School

Date Written: January 15, 2014

Abstract

Extant theory and empirical evidence suggest that strategies of diversification and geographic scope expansion carry benefits as well as costs. However, it is unclear whether the arguments relating diversification and geographic scope expansion with firm performance are applicable in the specific context of professional service firms (PSFs). These firms are also characterized by particular organizational features, such as the importance of maintaining an optimal leverage ratio, defined as the ratio between junior professionals and senior ones as partners. Our hypothesis development suggests an inverted U-shaped relationship between service line diversification, geographic scope and leverage on the one hand, and PSF performance on the other. We empirically test these relationships using fixed-effects regression and polynomial response surface analysis (RSA) on panel data from 61 German law firms from 2003 to 2012. RSA provides a finely-grained understanding of the relationships among the variables of interest. We find an inverted U-shaped performance effect of diversification and leverage, but no relationship between geographic scope and performance. Moreover, we find evidence of a complementary relationship between diversification and leverage ratio. We conclude with a discussion of our findings and their implications for theory and practice.

Keywords: diversification, leverage ratio, geographic scope expansion, professional service firms, response surface analysis

Suggested Citation

Karna, Amit and Richter, Ansgar and Schommer, Monika, Individual and Joint Performance Effects of Diversification, Geographic Scope and Organizational Leverage in Professional Service Firms: A Study of German Law Firms (January 15, 2014). EBS Business School Research Paper No. 14-10. Available at SSRN: https://ssrn.com/abstract=2388294 or http://dx.doi.org/10.2139/ssrn.2388294

Amit Karna

EBS Universität für Wirtschaft und Recht - EBS Business School ( email )

Gustav-Stresemann-Ring 3
65189 Wiesbaden, Hessen
Germany

Ansgar Richter (Contact Author)

University of Liverpool - Management School (ULMS) ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom
44 [0]151 795 3713 (Phone)
44 [0]151 795 3001 (Fax)

Monika Schommer

EBS Universität für Wirtschaft und Recht - EBS Business School ( email )

Gustav-Stresemann-Ring 3
65189 Wiesbaden, Hessen
Germany

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