Corporate Diversification and Efficiency of Manufacturing Firms Listed in Bursa Malaysia

By Doaei, Meysam; Anuar, Melati Ahmad et al. | Iranian Journal of Management Studies, October 2015 | Go to article overview

Corporate Diversification and Efficiency of Manufacturing Firms Listed in Bursa Malaysia


Doaei, Meysam, Anuar, Melati Ahmad, Ismail, Zuhaimy, Iranian Journal of Management Studies


(ProQuest: ... denotes formulae omitted.)

Introduction

Corporate diversification continues to be an important phenomenon in the modern business world (Cernas Ortiz, 2011). From the past, scholars in management area are attracted by corporate diversification due to the lateral scope of the firm impacts financial performance of firm (Fan et al., 2008). However, theoretical arguments about diversification are a profitable strategy or value reducing strategy is contradictory (Patrick, 2012). Based on agency theory and free cash flow theory, manager pursues their own interest; therefore, in this view product diversification has a negative impact on performance (Berger and Ofek, 1995; Denis et al., 1997). On the other hand, regarding efficiency theory, resource based theory and market power theory; diversification has a positive impact on financial performance. Also, some scholars such as Errunza and Senbet (1984), Lu and Beamish (2001), Tongli et al. (2005) and Kotabe et al. (2002) found positive relationship between diversification and performance. Finally, this issue should be studied more with other aspects such as efficiency.

In addition, in the area of diversification, the first issue is how financial performance measures? Regarding the literature, there is no consensus about what are the best measure for firm financial performance (Tongli et al., 2005). Therefore, to cover many aspect of firm's financial performance, this study has applied data envelopment analysis (DEA) (Jain et al., 2011; Lin et al., 2005; Rouse et al., 2010; Yeh, 1996).

Moreover, some researchers argued that firms in emerging market may be justified to have wider scope because market failures are more prevalent in these economies (Khanna and Palepu, 2000; Khanna and Rivkin, 2001; Lins and Servaes, 2002). In addition, firms listed in Bursa Malaysia are likely to be diversified and Claessens et al. (2001; 2003) stated that approximately 70%, Ishak and Napier (2004, 2006) said 55% of firms are diversified in Bursa Malaysia. Hence, based on the high rate of number of diversified firms in Bursa Malaysia, we conduct the research in this area.

The structure of the paper is as follows. The next section develops hypothesis under study through a review of the related literature. Section 3 is about DEA. Section 4 contains the data and empirical methodology. Section 5 and 6 report results and discussion. The final section offers some concluding remarks, limitation and future studies.

Related Studies

There are some theories that support why firms diversify (Doaei et al., 2012). Resource-based theory (Penrose, 1959) and market power theory (Edwards, 1955) confirm positive impact and agency theory (Jensen and Meckling, 1976) and free cash flow theory (Jensen, 1986) state negative impact of diversification on firm's financial performance. Therefore, some related studies are presented briefly.

Product Diversification and Performance

Theoretical arguments about diversification are a profitable strategy or value reducing strategy is contradictory. Generally, the studies show that product diversification has a negative impact on performance (Berger and Ofek, 1995; Chakrabarti et al., 2007; Denis, et al., 1997; Tongli, et al., 2005). In addition, other researcher explored product diversification was not associated with higher performance (MuñozBullón and Sanchez-Bueno, 2011). Additionally, Daud et al. (2009) showed firms with focused strategy can achieve high performance. In contrast, limited researchers found out not only diversification do not reduce the firm value, but also value increases when the level of diversification increases (Ishak and Napier, 2006).

As a result, based on agency theory and free cash theory, manager pursues their own interest; hence, the diversification has a negative impact on financial performance; additionally, many research proved a negative relationship between product diversification and financial performance (Anderson et al. …

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