Corporate Diversification and Firm Performance: An Inverted U-Shaped Hypothesis

International Journal of Organizational Leadership 5(2016) 381-398

18 Pages Posted: 2 Mar 2019

See all articles by Sajid Ali

Sajid Ali

Capital University of Science and Technology (CUST) - Department of Management Sciences

Shujahat Haider Hashmi

Capital University of Science and Technology (CUST) - Department of Management Sciences

Tahir Mehmood

Preston University - Faculty of Business Administration

Date Written: 2016

Abstract

This study aimed to investigate the relationship between corporate diversification and firm performance in a developing country. Previous studies have found that the mixed results have been established between these two constructs in developed countries such as linear, u-shaped or inverted u-shaped relationship. To this end, a sample of 141 non-financial companies over the period of 2003 to 2013 listed on Pakistani stock market was used to analyze the impact of diversification strategy on the performance of firm. Corporate diversification is divided into two types including product and geographic diversification. The findings of the study demonstrated that an inverted u-shaped relationship existed as performance increased up to a certain level due to the related diversification strategy and then it fell down drastically. It showed that too much diversification creates agency problems and internal inefficiencies. It has implications for agency problems, weak corporate governance structures, and family relationships.

Suggested Citation

Ali, Sajid and Haider Hashmi, Shujahat and Mehmood, Tahir, Corporate Diversification and Firm Performance: An Inverted U-Shaped Hypothesis (2016). International Journal of Organizational Leadership 5(2016) 381-398 , Available at SSRN: https://ssrn.com/abstract=3333003

Sajid Ali (Contact Author)

Capital University of Science and Technology (CUST) - Department of Management Sciences ( email )

Pakistan

Shujahat Haider Hashmi

Capital University of Science and Technology (CUST) - Department of Management Sciences ( email )

Pakistan

Tahir Mehmood

Preston University - Faculty of Business Administration ( email )

Pakistan

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