Firms' technological resources and the performance effects of diversification: A longitudinal study

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Abstract

While agency theory claims managerial self-interest creates a diversification discount, strategic theory explains that firms with certain kinds of resources should diversify. Longitudinal data on 227 firms that diversify between 1980 and 1992 reveal that the sample firms invest less in R&D and have greater breadth of technology (based on patent citations) than their industry peers prior to the diversification event. Also, acquiring firms may appear to have lower performance because of accounting conventions and because firms that use internal growth rather than acquisition pursue less extensive diversification. These findings help explain how diversification and financial performance are endogenous.

Original languageEnglish (US)
Pages (from-to)1097-1119
Number of pages23
JournalStrategic Management Journal
Volume25
Issue number11
DOIs
StatePublished - Nov 2004

All Science Journal Classification (ASJC) codes

  • Business and International Management
  • Strategy and Management

Keywords

  • Diversification
  • Longitudinal
  • Relatedness
  • Resource-based view

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