Product Line Diversification and Its Impact on Firm Performance

Abstract

The objective of the study is to measure product diversification’s impact on insurance firm’s financial performance in Pakistan. Analysis are carried out to examine how ownership structure, capitalization, group membership, firm size, diversification across business lines, industry concentration affects firm’s financial performance. Data from 2009-2019 is collected to measure the impact of diversification (entropy) on the risk- adjusted returns. Findings of the study reveal that business line diversification has strong positive effect on firm performance (for both ROA and ROE) which means that diversified firms perform better than non-diversified firms. For managers these findings are useful as they propose the need for diversification, capitalization, increase in size and group affiliation to enhance firm profitability.

Do geopolitical risks increase corporate risk‐taking?—Based on the perspective of diversification expansion

“…The transfer of resources between industries within a firm provides an important force against financial market dislocation (Matvos & Seru, 2014). Che and Liebenberg (2017) find that diversified insurers bear more asset risk than non‐diversified insurers and that asset risk‐taking is positively related to the degree of diversification, while Zia et al (2021) prove that diversification of an insurer's business line has a strong positive effect on firm performance (for both returns on asset and equity). Revenue diversification supports the portfolio investment theory in risk management, which means enterprises that adopt diversification expansion strategies minimize risk‐taking (A. D. Gupta & Moudud‐Ul‐Huq, 2020; Hunjra et al, 2020).…”