Persistence of outstanding performance and shareholder value among diversified firms: The impact of past performance, efficient internal capital market, and relatedness of business segments

The research domain that attempts to study the relationship between diversification and performance has not yet reached definitive and interpretable findings, and recent studies challenge the existence of a "diversification discount" and explain it partially by a data artefact. None of these studies centred their research on the question: does there exist a specific performance pattern among diversified firms? This research aims to identify persistence in performance heterogeneity by measuring the shareholder value creation of diversified firms using alternative indicators other than the excess value methodology. It also aims to measure the impact on the performance according to the degree of efficiency of the internal capital market and the degree of relatedness among business segments. A sample of 164 diversified firms with turnover higher than 1$ billion during the period 1999-2006 is examined. Because of the presence of the firm's specific effect and the length of the time series, the persistence performance is tested through the instrumental variables (IV) system generalized method of moments (GMM) dynamic panel data and the persistence of shareholder value creation and destruction is estimated according to different estimators from top tercile and lower tercile portfolios of diversified firms. Some diversified firms persistently create value as well as beat the market index while others persistently underperform. Finally, if the efficiency of the internal capital market gives certain explanatory power of the performance pattern, but limited compared to the past performance, important insights might be drawn from the findings that diversified firms with segments in many unrelated industries perform better than others in few industries or with a high number of segments; hence the inverted-U curvilinear relationship between diversification and performance is here not confirmed.