AN ANALYSIS OF THE DEGREE OF DIVERSIFICATION AND FIRM PERFORMANCE

A firm's diversification decision is likely to be a response of two interacting effects, one is the agent problem and the other is the economies of scale. Whether diversification causes a discount or a premium depends on the interaction of the two effects. This paper re-evaluates the effect of diversification on firm performance by examining firms with different degrees of diversification. We found the evidence that the diversification premium gets smaller if a firm engages in more than three industries.