The Herfindahl-Hirschmann Index (HHI) Revisited

33 Pages Posted: 8 Mar 2021 Last revised: 20 Dec 2021

See all articles by Tatenda Pasipanodya

Tatenda Pasipanodya

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

Anne Marie Knott

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

Date Written: November 25, 2021

Abstract

The Herfindahl-Hirschman Index (HHI) is one of the more commonly used measures in the Strategy and Economics literatures. While its principal uses are measuring market concentration or firm diversification, it has been extended beyond that. One concern with the measure is that an infinite set of distributions can have the same HHI. We assess whether that affects 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 count and shape (dissimilarity) components resolves the robustness problem. In particular, firm value increases in the number of units, but decreases in all measures of diversification when controlling for the number of units.

Keywords: Herfindahl index, diversification, geographic diversification

Suggested Citation

Pasipanodya, Tatenda and Knott, Anne Marie, The Herfindahl-Hirschmann Index (HHI) Revisited (November 25, 2021). Available at SSRN: https://ssrn.com/abstract=3762836 or http://dx.doi.org/10.2139/ssrn.3762836

Tatenda Pasipanodya (Contact Author)

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

St. Louis, MO
United States

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

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