Diversification and corporate performance: an evaluation of Pakistani firms
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Date
2008
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Abstract
Diversification continues to be an important strategy for corporate growth and better financial
performance. The relationship between the diversification strategy and profitability as well as
diversification and market power has been explored by a number of studies for the developed
economies. The present study is an attempt to investigate the relationship between diversification
and a firm’s financial performance in the case of Pakistan. A sample of 65 firms have been
categorized as diversified and non-diversified. For these firms, the financial performance
in terms of risk and return has been analyzed with the return measured by Return on Assets
(ROA), Return on Equity (ROE), Market Rate of Return (MKRT) and Tobin’s q, and the
coefficient of variation used as the measure of risk. The results show that the non-diversified
firms performed better than the diversified firms. However, the high return of non-diversified
firms is accompanied by low risk and the low return of diversified firms is more risky. But
there is a contrast in results based on book values and market values. The paper concludes
that managers have to be careful while selecting the degree of diversification since the diversified
firm may capture more market share but it can reduce its profitability
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Keywords
Corporate Growth, Financial Performance
Citation
South Asian Journal of Management 15(3), 7-18, 2008