South Asian Journal of Management

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Diversification and Corporate Performance:An Evaluation of Pakistani Firms


Affiliations
1 Department of Management Sciences, COMSATS Institute of Information Technology, Defence Road off Raiwind Road, Lahore, Pakistan
2 Department of Accounting and Finance, School of Business and Economics, University of Management and Technology C-II, Johar Town Lahore, Pakistan
     

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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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  • Diversification and Corporate Performance:An Evaluation of Pakistani Firms

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Authors

Talat Afza
Department of Management Sciences, COMSATS Institute of Information Technology, Defence Road off Raiwind Road, Lahore, Pakistan
Choudhary Slahudin
Department of Accounting and Finance, School of Business and Economics, University of Management and Technology C-II, Johar Town Lahore, Pakistan
Mian Sajid Nazir
Department of Management Sciences, COMSATS Institute of Information Technology, Defence Road off Raiwind Road, Lahore, Pakistan

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.