Investigating the Effectiveness of Business Portfolio Diversification Strategy on Financial Performance using Nonlinear Model in Parent Companies

Abstract

Objective Developing diversification is a corporate level strategy. Due to growth strategies at the corporate level strategy, managers should take into account financial performance relative to selected strategies in order to determine the type and the procedure to develop a firm. According to the literature, diversification as a growth strategy has various influences on performance at different stages of diversification. Therefore, in this study we aim to investigate the effectiveness of Business Portfolio Diversification Strategy on Financial Performance. Methodology In the present study, the sample population consists of 37 Iranian parent companies listed in Tehran stock exchange within 5-year period from 2012 to 2016. We analyzed the diversification degree and performance using Herfindahl–Hirschman Index and ROA. Size,growth and debt of companies are also used as control variables. Findings Based on the results of the t-test, there is a significant relationship between diversification and ROA (F= 0.00000 and R= 0.889855). Conclusion As the findings showed, there is a nonlinear relationship between diversification and financial performance. In addition, diversification causes destruction of values and reduction in profibilty.

Keywords

• diversification strategy
• business portfolio
• holding company