The time and frequency of unrelated diversification

Purpose The purpose of this paper is to examine the impact of internal corporate governance mechanisms, including interest alignment and control devices, on the unrelated diversification level in Vietnam. Additionally, the moderation of free cash flow (FCF) on these relationships is also tested. Design/methodology/approach The study is based on a balanced panel data set of 70 listed companies in both stock markets, Ho Chi Minh Stock Exchange and Hanoi Stock Exchange, in Vietnam for the years 2007–2014, which gives 560 observations in total. Findings The results show that if executive ownership for CEOs is increased, then the extent of diversification is likely to be reduced. However, the link between unrelated diversification level and executive stock option, another interest alignment device, cannot be confirmed. Among three control devices (level of blockholder ownership, board composition and separation of CEO and chairman positions), the study finds a positive connection between diversification and blockholder ownership, and statistically insignificant relations between the conglomerate diversification level and board composition, or CEO duality. Additionally, this study discovers a negative link between diversification and state ownership, although there is no evidence to support the change to the effect of each internal corporate governance mechanism on the diversification level of a firm between high and low FCF. Practical implications The research can be a useful reference not only for investors and managers but also for policy makers in Vietnam. This study explores the relationship among corporate governance, diversification and firm value in Vietnam, where the topics related to effectiveness of corporate governance mechanisms to public companies has been increasingly attractive to researchers since the default of Vietnam Shipbuilding Industry Group (Vinashin) happened in 2010 and the Circular No. 121/2012/TT-BTC on 26 July 2012 of the Vietnamese Ministry of Finance was issued with regulations on corporate governance applicable to listed firms in this country. Originality/value This research, first, enriches current literature on the relationship between corporate governance and firm diversification. It can be considered as a contribution to the related topic with an example of Vietnam, a developing country in Asia. Second, the research continues to prove non-unification in results showing the relationship between corporate governance and conglomerate diversification among different nations. Third, it provides a potential input for future research works on the moderation of FCF to the effects of corporate governance on diversification.

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The decrease in diversification and corporate governance: evidence from Japanese firms

Corporate Ownership and Control ◽

10.22495/cocv6i4p3 ◽

2009 ◽

Vol 6 (4) ◽

pp. 28-39

Author(s):

Hidetaka Aoki

Keyword(s):

Firm Performance ◽

Capital Market ◽

Firm Value ◽

Boards Of Directors ◽

Manufacturing Firms ◽

Business Units ◽

Unrelated Diversification ◽

Japanese Firms ◽

Bubble Economy ◽

Main Bank

This paper analyzes the effects of firm performance and governance factors on the decrease in diversification of Japanese firms in the 1990s. We focus on the cases of the decrease in diversification, because many previous studies proved that diversification caused firm value discount. Adjusting an excessive unrelated diversification would be an important topic, because the problems of low synergy between business units, inefficiency in management and so on were more serious in this type of diversification. The findings of this study are as follows. In the first half of the 1990s, immediately after the collapse of bubble economy, lower firm performance and main bank relationship encouraged firms to decrease the level of diversification of their businesses. On the other hand, in the latter half of the 1990s when the decrease in diversification itself was activated, higher performing non-manufacturing firms and manufacturing firms with lower profitability but facing higher growth in their main business tried to decrease diversification in order to strengthen the competitiveness in main businesses. Also, this kind of decrease in diversification was supported by the governance characteristics such as insider majority smaller boards of directors and the pressure from capital market.

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Pengaruh Risiko Bisnis, Life Cycle Dan Diversifikasi Terhadap Struktur Modal Serta Hubungannya Dengan Nilai Perusahaan Manufaktur Di Indonesia

Jurnal Manajemen Teori dan Terapan | Journal of Theory and Applied Management ◽

10.20473/jmtt.v9i1.2787 ◽

2016 ◽

Vol 9 (1) ◽

Author(s):

Septi Diana Sari

Keyword(s):

Life Cycle ◽

Capital Structure ◽

Firm Value ◽

Order Theory ◽

Diversification Strategy ◽

Single Segment ◽

Unrelated Diversification ◽

Related Diversification ◽

Positive Effect ◽

The Capital Structure

This study aims to examine the factors that affect the capital structure. The task of the financial manager is to determine the amount of capital structure to enhance shareholder value. Since the capital structure associated with firm value , this study also aimed to examine the effect of capital structure on firm value by considering the company's diversification strategy and corporate life cycle stages . By using the data obtained from the OSIRIS period 2009-2012, researchers used multiple regression test and path analysis to test the hypothesis. From the test results stated that only companies which are in the start-up phase which has a significant positive effect on the capital structure , as well as the diversification strategy has an influence on the capital structure of the company's capital structure with a sequence of related diversification > unrelated diversification > single segment. But when regressed diversification strategy with corporate values, only a single segment strategy and related diversification which significantly affect the value of the company, as well as the positive effect of capital structure on firm value. Most of the results of this study can be explained by the signaling effect and the pecking order theory.

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Ownership Effects on Unrelated Diversification: An Institutions’ Perspective

Advances in Strategic Management - Finance and Strategy ◽

10.1108/s0742-332220140000031007 ◽

2014 ◽

pp. 253-288 ◽

Cited By ~ 6

Author(s):

Nikolaos Kavadis ◽

Xavier Castañer

Keyword(s):

Unrelated Diversification

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Product diversification and large construction firm productivity: the effect of institutional environments in Malaysia

Engineering Construction & Architectural Management ◽

10.1108/ecam-05-2020-0288 ◽

2020 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Mohd Azrai Azman ◽

Carol K.H. Hon ◽

Bo Xia ◽

Boon L. Lee ◽

Martin Skitmore

Keyword(s):

Firm Performance ◽

Positive Impact ◽

Product Diversification ◽

Content Type ◽

Construction Firms ◽

Unrelated Diversification ◽

Construction Firm ◽

Related Diversification ◽

Generalised Method Of Moments ◽

The Impact

PurposeMany large construction firms (LCFs) adopt product diversification (PD) to counter downturns and spread risks. However, no detailed information is available concerning the type of PD that improves their performance. In addition, it is still uncertain how much changes in institutional dimensions influence the effectiveness of PD. Therefore, the aim is to resolve this issue by establishing a model that shows the extent of this influence.Design/methodology/approachThe generalised method of moments (GMM) estimator is used to model the PD strategies of 86 LCFs in Malaysia over 14 years (2003–2016) and its impact on productivity and profitability performance.FindingsUnrelated diversification (UD) decreased firm performance in 2003–2016, while related diversification (RD) had a positive impact during the more liberal 2010–2016 phase. The models show that the impact of PD is highly dependent on changes in institutional dimensions.Practical implicationsFirstly, managers may adjust the type of PD and its level of diversification to improve firm performance. Secondly, they may devise PD strategies based on changes in institutional dimensions to maximise their effectiveness.Originality/valueThe study contributes to the literature by determining the optimal amount of PD (including RD and UD) and its impact on performance. Secondly, the study is the first to investigate the moderating relationship of the institutional dimensions of economic and regulatory institutions on PD-firm performance. Thirdly, the study is the first to explore the components of technical-scale-scope economies (movement towards and around the production frontier), this being crucial to the strategy that was only conjectured in previous studies.

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Corporate or Product Diversification

Oxford Research Encyclopedia of Business and Management ◽

10.1093/acrefore/9780190224851.013.14 ◽

2017 ◽

Cited By ~ 1

Author(s):

Margarethe F. Wiersema ◽

Joseph B. Beck

Keyword(s):

Distribution Channels ◽

Shareholder Wealth ◽

Product Diversification ◽

Strategic Decision ◽

Business Trend ◽

Corporate Diversification ◽

Diversification Strategy ◽

Unrelated Diversification ◽

Strategic Assets ◽

Related Diversification

Corporate or product diversification represents a strategic decision. Specifically, it addresses the strategic question regarding in which businesses the firm will compete. A single-business company that expands its strategic scope by adding new businesses becomes a diversified, multibusiness company. The means by which a company expands its strategic scope is by acquiring businesses, investing in the development of new businesses, or both. Similarly, an already diversified firm can reduce its strategic scope by divesting from or closing businesses. There are two fundamentally different types of corporate diversification strategy, depending on the interrelatedness of the businesses in the company’s portfolio: related diversification and unrelated diversification. Related diversification occurs when the businesses in the company’s portfolio share strategic assets or resources, such as technology, a brand name, or distribution channels. Unrelated diversification occurs when a company’s businesses do not share strategic assets or resources and do not have interrelationships of strategic importance. Companies can pursue both types of diversification simultaneously, and thus have a portfolio of businesses both related and unrelated. In addition to variations in the type of diversification, companies can vary in the extent of their diversification, ranging from business portfolios with very limited diversification to highly diversified portfolios. Decisions regarding the diversification strategy of a firm represent major strategic scope decisions since they impact the markets and industries in which the company will compete. Companies can increase or reduce their level of diversification for a variety of reasons. Economic motives, for example, include the pursuit of economies of multiproduct scale and scope, whereby per-unit costs may be lowered through the increase in sales volume or other fixed-cost reducing benefits associated with growth through diversification. In addition, companies may diversify for strategic reasons, such as enhancement of capabilities or superior competitive positioning through entry into new product markets. Similarly, economic and strategic reasons can motivate the firm to refocus and reduce its level of diversification when the strategic and economic rationales for being in a particular business are no longer justified. The performance consequences of corporate diversification can vary, depending on both the extent of the firm’s diversification and the type of diversification. In general, research indicates that high levels of diversification are value-destroying due to the integrative and complexity-associated costs that administering an extremely diversified portfolio imposes on management. Nevertheless, related diversification, where the company shares underlying resources across its business portfolio (e.g., brand, technology, and distribution channels), can lead to higher levels of performance than can unrelated diversification, due to the potential for enhanced profitability from leveraging shared resources. Corporate diversification was a major U.S. business trend in the 1960s. During the 1980s, however, pressure from the capital market for shareholder wealth maximization led to the adoption of strategies whereby many companies refocused their business portfolios and thus reduced their levels of corporate diversification by divesting unrelated businesses in order to concentrate on their predominant or core business.

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Business Groups as an Organizational Model

Oxford Research Encyclopedia of Business and Management ◽

10.1093/acrefore/9780190224851.013.97 ◽

2018 ◽

Cited By ~ 2

Author(s):

Asli M. Colpan ◽

Alvaro Cuervo-Cazurra

Keyword(s):

Negative Impact ◽

Group Structure ◽

Business Groups ◽

Product Diversification ◽

Organizational Model ◽

Listed Firms ◽

Institutional Settings ◽

Narrow Scope ◽

Unrelated Diversification ◽

Advanced Economies

Business groups are an organizational model in which collections of legally independent firms bounded together with formal and informal ties use collaborative arrangements to enhance their collective welfare. Among the different varieties of business groups, diversified business groups that exhibit unrelated product diversification under central control, and often containing chains of publicly listed firms, are the most-studied type in the management literature. The reason is that they challenge two traditionally held assumptions. First, broad and especially unrelated diversification have a negative impact on performance, and thus business groups should focus on a narrow scope of related businesses. Second, such diversification is only sustainable in emerging economies in which market and institutional underdevelopment are more common and where business groups can provide a solution to such imperfections. However, a historical perspective indicates that diversified business groups are a long-lived organizational model and are present in emerging and advanced economies, illustrating how business groups adapt to different market and institutional settings. This evolutionary approach also highlights the importance of going beyond diversification when studying business groups and redirecting studies toward the evolution of the group structure, their internal administrative mechanisms, and other strategic actions beyond diversification such as internationalization.

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