Disentangling the impacts of industrial and global diversification on firm risk

Abstract

We examine the impact of corporate diversification on firm risk exposure from 1998 to 2016. We find that both global and industrial diversification mitigate idiosyncratic and world market risk while having a negligible impact on U.S. market risk, but the effects vary before, during, and after the financial crisis of 2007-2009. Before the crisis, only global diversification mitigates idiosyncratic risk, but it increases firms' exposure to world market risk. During the crisis, industrial diversification increases idiosyncratic risk, but both types of diversification increase exposure to U.S. market risk. After the crisis, both types of diversification increase firms' exposure to U.S. market risk but have negligible impact on idiosyncratic and world market risk. Our findings remain robust after we control for the potential endogeneity of the diversification decision through various self-selection models.

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“…In the literature, there is also such an emphasis on the two types of diversification, industrial and international. Industrial diversification is considered as the company's involvement in different segments, and occurs when companies in their origin country expand operations in different segments in order to diversify their income streams (Jafarinejad et al, 2018). International diversification is considered an expansion operation in several countries, reflecting the number of international markets in which the company operates (Delbufalo et al, 2016).…”

“…In addition, diversification allows the company to obtain and exploit economies of both scale and scope, amortize investments in critical areas, and thus provide location advantages, progressing with synergies towards reducing operational risks in different markets (Kim & Mathur, 2008;Lee et al, 2012;Delbufalo et al, 2016). As companies expand, they tend to face numerous challenges as well as different opportunities, and in the context of diversified companies it is no different (Jafarinejad et al, 2018). Among the opportunities arising from diversification, the advantages for the operating result stand out, considering the implications for operating risk and profitability.…”

“…It is understood that diversification allows for less exposure and dependence on a single market or segment. That is, as they are less sensitive to fluctuations, economic conditions or customer demands in a given market, they present lower levels of risk in operations (Kang et al, 2012;Song et al, 2017;Jafarinejad et al, 2018).…”

Diversifikasi Internasional Dan Kinerja Perusahaan Manufaktur Di Indonesia Dengan Efisiensi Sebagai Variabel Moderasi

“…Menurut penelitian (Yang et al, 2017), diversifikasi merupakan strategi perluasan bidang usaha terhadap kekuatan pasar, industri dan segmen serta sektor yang sebagian besar disebabkan karena adanya persaingan dalam lingkungan bisnis yang semakin ketat. Jenis strategi diversifikasi dibedakan menjadi dua yaitu diversifikasi industri dan diversifikasi internasional (Jafarinejad et al, 2018) yang sama-sama memainkan peran penting dalam keputusan strategi yang akan dilakukan oleh perusahaan. Salah satu jenis strategi diversifikasi yang beberapa tahun terakhir ini bisa membuat perusahaan semakin berkembang ke pangsa pasar internasional sehingga dapat meningkatkan kinerja perushaaan adalah diversifikasi internasional (Benito-Osorio et al, 2016).…”

Diversification of Russian Oil and Gas Upstream Companies

“…The influence of diversification on the risks of the company is investigated in the article of Jafarinejad et al (2019). A study was conducted on the data for the period of 1998-2016.…”