Academic journal article South Asian Journal of Management

Diversification and Firm Performance: The Moderating Influence of Ownership Structure and Business Group-Affiliation

Academic journal article South Asian Journal of Management

Diversification and Firm Performance: The Moderating Influence of Ownership Structure and Business Group-Affiliation

Article excerpt

Investigations into the relationship between corporate diversification and firm performance represent one of the most actively investigated areas in the fields of strategy and finance. However, despite the enormous interest in the field, the debate on whether corporate diversification creates or destroys value remains inconclusive with several studies offering differing results on the phenomena among different institutional contexts. Moreover, much of the earlier empirical research has exclusively focused on merely examining the influence of various diversification measures on firm performance. This study examines the diversification-performance relationship by extending these prior studies by explicitly analyzing the impact of ownership structure and business group-affiliation in influencing this relationship. These differences in ownership structure and business group-affiliation have generally been ignored by much of the prior research in this area. Utilizing the theoretical underpinnings of agency and resource-based perspectives, hypotheses are formulated which postulate a differential influence of the impact of corporate diversification on firm performance depending on the firms ownership structure and group-affiliation. In a nutshell, the paper attempts to bring together two broad literature streams: one examining corporate governance characteristics such as ownership structure and business group affiliation; and second examining diversification-performance issues with the overall objective of attaining a more composite understanding of a strategic decision of vital import, namely corporate diversification.

INTRODUCTION

Research on the relationship between corporate diversification and firm performance has a long history, which goes back by some four decades. Beginning with the pioneering work of Rumelt (1974), numerous researchers have attempted to examine the issue. Yet, despite this close scrutiny, the debate on whether corporate diversification creates or destroys value remains inconclusive with numerous studies offering differing results on the phenomena among different institutional contexts. Surveys by Palich et al. (2000) and Martih and Sayrak (2003), examining the phenomenon from the strategy and finance perspectives, attest to the wide ranging and continuing interest in the subject.

While much of the earlier empirical research has exclusively focused on merely examining the influence of various diversification measures on firm performance, this study attempts a departure from the standard norm. Taking cue from suggestions advocated way back by Chandler (1962) and more recently by Dess et al. (1995), the study examines the diversification-performance relationship by explicidy analyzing the impact of ownership structure and business group-affiliation in influencing this relationship. These differences in organizational form (as represented by group-affiliation) and ownership structure have generally been ignored by much of the prior research in this area.

This paper attempts to address this lacuna and to make a contribution to the literature in the field in view of the relative paucity of studies that have examined this issue especially in an emerging economy context such as India. Specifically, this paper throws light on how and why the firms' ownership structure ard business group-affiliation (which is a widely prevalent organizational form arid in many developed and emerging markets) influences the diversificationperformance relationship. Since this study is based in an emerging economy setting concerning a sample of firms from India, organizational characteristics such as business groups and the effects of family shareholdings on the firm's strategic choices and their consequent effects on performance hold particular relevance.

The remainder of the paper examines the theory underpinning the reasons why firm diversify, their performance implications and specific hypotheses concerning the impact of firm diversification on performance and the moderating impact of group-affiliation and ownership are developed. …

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