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Corporate Diversification and Performance: An Investigation of Causality
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Ernest H. Hall, Jr.
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Abstract
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The relationship between corporate diversification and organisation performance has been widely studied in the strategy literature (Christensen and Montgomery 1981; Lubatkin and Rogers 1989; Rumelt 1974, 1982). Although not universally accepted, the general prescription given to firms is that related diversification will lead to superior levels of performance while unrelated diversification will recognise inferior levels of performance (Rumelt 1974, 1982). But the issue of causality has not received very much attention (Grant, Jammine and Thomas 1988). The present study will address several questions: What is the effect of a firm's previous performance on its future diversification? Does diversification determine performance or does performance determine diversification? Results suggest that, regardless of strategic type, high levels of profitability may be necessary, but not sufficient requirements for diversification. Likewise, it was found that in certain situations, superior performance may serve as a substitute for diversification.
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Keywords
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CORPORATE DIVERSIFICATION; FIRM PERFORMANCE; CAUSALITY.
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Contact Details
Ernest H. Hall, Jr.
School of Business
University of Southern Indian
Evansville INDIANA 47712
U.S.A.
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I would like to express my thanks to the editor and anonymous reviewers of the AUSTRALIAN JOURNAL OF MANAGEMENT for their thoughtful comments and suggestions.
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