Diversification and Value Creation

Annotated Bibliography on Value Creation Through Diversification
Glvan, A., Pindado, J., & De La Torre, C. (2014). Diversification: A value-creating or value-destroying strategy? Evidence from the Eurozone countries. Journal of Financial Management, Markets, and Institutions, 2(1), 43-64.
This research is aimed at showing the relationship between company value and product diversification strategy. The study digs deep into the types and levels of diversification to determine the real value addition that can be achieved using this strategy. The method used to calculate the benefits of diversification is regression, and the diversification measures used include the Revenue-based Herfindahl Index and Total Entropy. Other traditional variables that impact firms' value are also included in the function.
The study results showed that diversification impacts the firm's value, but a breakpoint marks the maximum benefits. Going beyond this point drops the value of the company. A more significant section of previous research is based outside the UK and US, and that's is why we used the Eurozone dataset to show the evidence. To achieve consistency, we used panel data methodology, and it involved observing over ten firm-years, followed by regression tests on variables that showed some character.
Setianto, R. H. (2020). Corporate diversification and firms' value in an emerging economy: the role of growth opportunity. Journal of Asian Business and Economic Studies.
This study applies an empirical research method to show the relationship between firm diversification and its value in modern economic environments. The data used is from a manufacturing firm based in Indonesia and the span period is five years. A nonlinear regression model was applied since the experiment was to determine if there was a nonlinear relationship between value and diversification. The test was also aimed at observing any role by growth opportunities in determining the company's value in connection with the diversification strategy.
The outcome of the research was that there is a relationship between U-shaped diversification and value. At low levels of diversification, the company's value may be affected negatively, but the graph may reverse at some higher points. This indicates that the impact is not uniform across firms. Another factor that impacts the firm's value is a growth opportunity, and therefore it should be factored in when deriving the relationships. It is important to determine the optimal point to gain the most benefit out of diversification. This study utilizes the available literature to analyze the effect of diversification strategy on the firm's value. The main focus is on the changes happening in the modern economy.
Schommer, M., Richter, A., & Karna, A. (2019). Does the diversification–firm performance relationship change over time? A meta?analytical review. Journal of Management Studies, 56(1), 270-298.
This research has some limitations that need a fix in future studies. The first issue of concern is the diversification changes that will happen in the future. These changes will affect the theories and methodologies used in the research. The second issue is in the regression analysis, where we expect many technical changes in the variables used. The third limitation is basing the diversification study on a specific firm. Diversification happens at all levels of companies, and therefore some conditions may not hold in some cases.
Even with the limitations, one common thing is that changes happen after applying the diversification strategy. Therefore, we can conclude a relationship exists between firms' performance and diversification. It is worth noting that variations are expected at different points of the diversification process.
Otero-Serrano, J. (2011). Does Firm Diversification Represent a Value Added for Stockholders? International Journal of Business and Finance Research, 5(4), 99-113.
This paper is aimed at testing whether diversification affects the company's performance. In this empirical study, time will be a critical element to determine the performance trends in different periods. The information used in this study is from a Compustat database of various global companies, and the filter criteria are the period between 1979 and 2006.
The study shows that companies that have not applied diversification strategy underperform compared to those that apply. Firms should always determine the optimal point to reap maximum benefits out of diversification. The evidence collected from the research was from reports given by stakeholders, including those holding high positions such as managers. The study's limitation was using the Compustat database, which is not always elaborate on some reports.
References
G?lvan, A., Pindado, J., & De La Torre, C. (2014). Diversification: A value-creating or value-destroying strategy? Evidence from the Eurozone countries. Journal of Financial Management, Markets, and Institutions, 2(1), 43-64.
Otero-Serrano, J. (2011). Does Firm Diversification Represent a Value Added for Stockholders? International Journal of Business and Finance Research, 5(4), 99-113.
Schommer, M., Richter, A., & Karna, A. (2019). Does the diversification–firm performance relationship change over time? A meta?analytical review. Journal of Management Studies, 56(1), 270-298.
Setianto, R. H. (2020). Corporate diversification and firms' value in an emerging economy: the role of growth opportunity. Journal of Asian Business and Economic Studies.