How Diversification can help CEOs Financially

Akpinar, O, and Yigit, I. (2016). The Relationship Between Diversification Strategy and Firm Performance in Developed and Emerging Economy Contexts: Evidence from Turkey, Italy And the Netherlands. Journal of Economic and Social Development, 3(2), 78-86.

This research encompassed a close look at data from 166 firms in the Netherlands, 265 firms in Italy, and 128 firms in Turkey (using data from 2007-2011). The point of the research was to explore the difference between various types of diversification and production performance in those three nations. Akpinar (professor, Kocaseli University in Kocaseli Turkey), and Yigit (business faculty member at Marmara University in Turkey) explain that "Related Diversification" is market expansion into new areas, and "Unrelated Diversification" is expansion into a new market "having no relation with the existing one" (Akpinar, et al., 2016).

The hypothesis used by the authors: there would be a positive relationship between "performance and related entropy index" vis-a-vis diversification in Italy and the Netherlands (both developed countries), but no such relationship in Turkey (an emerging country) (83). That hypothesis proved inaccurate. The authors expected there would be no correlation between the diversification and performance in Turkey; it is an "emerging" country (many privatization policies are in place). But the hypothesis was rejected for Italy and Holland, because of the recent "worldwide economic crisis" -- which impacted developed countries (Akpinar, 86). The data used was reliable; this is valid research because it examined diversification vs. production; and a limitation of the study was that it only involved 3 countries; and other variables could be considered (national income, gross national product and "crisis conditions" (Akpinar, 86).

Florentina, R. (2012). Corporate Governance and Corporate Diversification Strategies. Review Of International Comparative Management, 13(4), 621-632.

Raluca Florentina is a professor at the Bucharest University of Economic Studies in Romania, and in this peer-reviewed piece the author evaluates the causality relationship between "corporate governance and corporate diversification strategies in the context of the global economic crisis" (Florentina, 2012). Corporate governance is based on the theory of the "organization and the expenses it implies," and the organization's efforts to clarify relationships "between the several actors to the determination of management" (Florentina, 621). Good governance " . . . reduces risks, increases performance . . . improves managerial style," and offers transparency vis-a-vis "social responsibility" (Florentina, 624). But when there are "inefficient policies" and "agency conflicts" within diversification, the firm is harmed (Florentina, 621).

Florentina's research (not based on specific empirical data) shows that diversified companies' long-term indebtedness is 4% higher than concentrated (non-diversified) companies (627). Moreover, the value of stocks for the CEO and directors and managers drops by about 6.6% with diversification (juxtaposed with non-diversification); however, salaries for CEOs with diversified companies are roughly $100,000 higher than CEOs with concentrated firms (Florentina, 627). Hence, managers can benefit from diversification -- even if the company doesn't become wealthier through the diversification. This is a key point in this research paper: not only do CEOs and managers / directors tend to earn more with diversification, CEOs enjoy the "recognition and fame of managing a large business"; and in addition, the cost of "disinvestment" of assets is significant (the termination of contracts is an additional cost as is payback to the shareholders) (Florentina, 631). The limitations of this research: the author did not use contrasting financial data from specific firms that either diversified or didn't diversify.

Mitton, T. (2012). Inefficient Labor or Inefficient Capital? Corporate Diversification and Productivity around the World. Journal of Financial and Quantitative Analysis, 47(1), 1-22

The salient point and purpose of research into corporate diversification, according to author Mitton, is to gain a better understanding of the "performance implications for firms that diversify into multiple product segments" (Mitton, 2012). In this peer-reviewed article, the author studied a sample of over 500,000 companies from 46 countries in order to understand the relation between diversification and labor productivity. Mitton, professor of business at the Marriott School of Management (Brigham Young University), learned that while greater diversification " . . . is associated with significantly lower labor productivity," firms that do diversify "operate in multiple industries," so productivity would be expected to be different from firms operating in the same primary industry" (Mitton, 10).

Mitton writes that his research has limitations; it is not "a one-size-fits-all" prescription because specific financial conditions of the country a firm operates in impacts the diversity / production relationship (20). And his "empirical results" show that diversification in a country with "strong financial development" will have "lower labor productivity" than diversification in a nation with poor financial development. The author points out (this is an important point within this discussion) that if a country is simply using diversification as part of "empire building," that firm is "more likely to experience capital misallocation," and as a result, a loss of productivity can be expected (20).

Zhang, P. (2014). Understanding Diversification Strategy in Venture Capital Market. Entrepreneurship Research Journal 4(3), 277-296.

The author in this piece (an associate professor of management at the Coggin College of Business, University of North Florida) researches how diversification impacts the performance of venture capital (VC) companies. The bottom line is that -- through researching the "secondary data of VC investment" that is gleaned from knowledge management literature published between the years 2002-2012 -- diversification is "associated with better firm performance" (Zhang, 2014). Two kinds of investment strategies for VC firms: specialization (a "low level of diversification" for a few businesses in one industry); and diversification (this targets "multiple businesses across various industries" (Zhang, 277). This research embraced the "Pratt's Guide to Private Equity and Venture Capital" database -- zeroing in on VC diversification in New York, California, and Massachusetts.

What is not widely known, Zhang writes (283), is that young venture capitalists don't just shell out cash and wait to see if the investment was sound. After identifying a "viable business model," they also help new ventures: a) develop organizational structures; b) transfer marketing experiences; c) recruit key personnel; d) provide technological insights; e) secure follow-up financing," strengthening related diversification (which has a "distinctive advantage over unrelated diversification") (Zhang, 283). This research is significant because it shows the level of research and follow-up support needed for VC firms. It also is valuable because many technology companies got their start through VC investments, and when those same companies diversified, they also counted on investments from venture capitalists. Today's student may be among entrepreneurs in the future, and should take stock of VC resources. Limitations: future studies should apply a different strategy, Zhang explains (294). And future research should "correct the data selection bias by building a more inclusive database" than the Pratt's Guide.