Effects of diversification on firm performance: an analysis of Indian firms

Abstract

This study has empirically tested the relationship between diversification and firm performance using balanced panel data on 1759 firms in India. We include firms across all industries in the manufacturing and service sector during the period 2012-2018. Our dynamic panel estimation results indicate that diversification measured by count, entropy index, or weighted diversification index, does not have a statistically significant impact on performance measured by Tobin's Q and Return on Assets (ROA). The results hold irrespective of firm size, firm age, and group affiliation. Our robustness test, applying 2SLS method, corroborates the above findings for ROA but shows a negative relation with Tobin's Q for some measures of diversification.