Effect of diversification strategy on firm performance with application of entropy measure in Tehran Stock Exchange

Abstract

Firm managers seek a way to improve their firm performance. One way is to use diversification strategy which creates range of business activities for the firms and leads to a better performance. This study examines the effect of diversification strategy on performance of 87 companies listed on Tehran Stock Exchange from 2010 to 2014. The main objective of this study is to investigate the non-liner relationship between diversification strategy and profitability of business units by sorting it into its related and unrelated components. In this study, multivariate linear regression model is used to test the hypotheses. The statistical method is Panel Data. The results showed that there is a curve-shaped relationship between diversification and profitability of business units; that is, profitability decreases at low levels of related diversification and increases at its high levels; also profitability increases at low levels of unrelated diversification and decreases at its high levels.

Keywords

• Diversification strategy
• entropy measure
• related diversification
• unrelated diversification