Diversification and Desynchronicity: An Organizational Portfolio Perspective on Corporate Risk Reduction

Xue-Feng Shao; Kostas Gouliamos; Ben Nan-Feng Luo; Shigeyuki Hamori; Stephen Satchell; Xiao-Guang Yue; Jane Qiu

doi:10.3390/risks8020051

Risks (May 2020)

Diversification and Desynchronicity: An Organizational Portfolio Perspective on Corporate Risk Reduction

Xue-Feng Shao,
Kostas Gouliamos,
Ben Nan-Feng Luo,
Shigeyuki Hamori,
Stephen Satchell,
Xiao-Guang Yue,
Jane Qiu

Affiliations

Xue-Feng Shao: Discipline of International Business, The University of Sydney, Sydney, NSW 2006, Australia
Kostas Gouliamos: Department of Management and Marketing, School of Business Administration, European University Cyprus, 1516 Nicosia, Cyprus
Ben Nan-Feng Luo: School of Labor and Human Resources, Renmin University of China, Beijing 100872, China
Shigeyuki Hamori: Graduate School of Economics, Kobe University, 2-1 Rokkodai, Nada-Ku, Kobe 657-8501, Japan
Stephen Satchell: Discipline of Finance, The University of Sydney, Sydney, NSW 2006, Australia
Xiao-Guang Yue: Department of Management and Marketing, School of Business Administration, European University Cyprus, 1516 Nicosia, Cyprus
Jane Qiu: Australian Graduate School of Management, University of New South Wales, Sydney, NSW 2031, Australia

DOI: https://doi.org/10.3390/risks8020051
Journal volume & issue: Vol. 8, no. 2
p. 51

Abstract

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A longstanding objective of managers is to reduce risk to their businesses. The conventional strategy for risk reduction is diversification; however, evidence for the effectiveness of diversification remains inconclusive. According to Organizational Portfolio Analysis, firms are viewed as portfolios of business units, and the key to risk reduction is both diversification and synchronization compensation. This study introduces “desynchronicity”, a process that operationalizes synchronization compensation by assessing the degree of correlation between income streams of business units. Two samples of 737 and 332 firms (from COMPUSTAT) were used to empirically test the relationships between diversification and risk, and desynchronicity and risk. The results show that diversification alone will not always lead to a lower corporate risk. To reduce risk, firms also need to consider the desynchronicity of their business portfolios. Other practical implications include improved decisions on portfolio composition.

Published in Risks

ISSN: 2227-9091 (Online)
Publisher: MDPI AG
Country of publisher: Switzerland
LCC subjects: Social Sciences: Finance: Insurance
Website: http://www.mdpi.com/journal/risks

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