Does Firm Diversification Represent a Value Added for Stockholders?

This study empirically tests the effect of diversification on firm performance, controlling for factors influencing returns other than diversification. This study also investigates if the diversification effect has the same impact on firm performance at different points in time. The sample used consists of all firms with available data from Compustat Industry Segment Database and Research Files for the period between 1979 and 2006. Carhart (1997) four-factor model results suggest that diversification is related to firm performance. Diversified firms show a general trend of underperforming non-diversified firms. Results also suggest that the diversification effect may change through time. The evidence presented may help managers and stockholders in considering the effects of diversification on firm value when making decisions