The effect of diversification on firm returns in chemical and oil industries

Purpose – The purpose of this paper is to investigate the effect of diversification on returns of firms in chemical and oil industries. Design/methodology/approach – In order to control for market effect, industry effect, and effects of endogenous variables of a sample firm that lead the firm to decide to diversify or refocus on stock returns, three‐factor asset‐pricing models introduced by Fama and French are used in each industry. Findings – It is found that diversified firms have significantly higher returns than focused firms in both chemical and oil industries. It is also found that the three‐factor model explains much of the variation in the average stock returns for both focused firms and diversified firms, which is consistent with Fama and French. Originality/value – Provides new evidence for the effect of diversification on firm returns in oil and chemical industries.