The effect of diversification on performance revisited: diversification discount, premium, or both?

In this paper we argue conceptually and show empirically that the effect of diversification on performance is not homogeneous across industries, as previously assumed in the literature on diversification in strategy and finance. Some industries may be more friendly environments for diversified firms than for specialists, or vice versa. After replicating the main findings in finance and strategy, we show that the number of specialists in an industry is an important moderator of the diversification-performance relationship, which determines the existence of a diversification discount, a premium, or the curvilinear relationship frequently found in strategy research.