The Herfindahl-Hirschmann Index (HHI) Revisited

35 Pages Posted: 8 Mar 2021 Last revised: 30 Nov 2023

See all articles by Anne Marie Knott

Anne Marie Knott

Washington University in St. Louis - John M. Olin Business School

Tatenda Pasipanodya

Washington University in St. Louis - John M. Olin Business School

Date Written: June 6, 2023

Abstract

The Herfindahl-Hirschman Index (HHI) is one of the more commonly used measures in the Management and Economics literatures. While its principal uses are measuring market concentration or firm diversification, it has been extended beyond that. The measure has two properties that potentially affect empirical inference: 1) it is a compound measure--intentionally combining fewness and skewness; 2) any given HHI represents an infinite set of distributions. We assess whether these properties affect inferences in strategy research. To do so, we replicate a prior study which employs HHI to test the impact of geographic diversification on firm value. We find that results with HHI are not robust across samples and specifications. We further find that decomposing HHI into its fewness and skewness components resolves the robustness problem. In particular, firm value increases in the number of units, but decreases with dissimilarity across units. These results reinforce Penrosian theories of growth through related diversification.

Keywords: Herfindahl index, diversification, geographic diversification

Suggested Citation

Knott, Anne Marie and Pasipanodya, Tatenda, The Herfindahl-Hirschmann Index (HHI) Revisited (June 6, 2023). Available at SSRN: https://ssrn.com/abstract=3762836 or http://dx.doi.org/10.2139/ssrn.3762836

Anne Marie Knott

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States

Tatenda Pasipanodya (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

St. Louis, MO
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
793
Abstract Views
4,555
Rank
67,543
PlumX Metrics