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Introduction to Diversification
Diversification can best be described as an investing strategy that is constructed for
managing risk, specifically reducing the risk of an undiversified portfolio (Mauer, 2020). This
strategy involves mixing a variety of investments into a portfolio, so the concentration of money
is no longer in one single company but rather distributed across a large range of different
companies and industries. This strategy is said to be justifiable on account of the idea that this
diverse portfolio will produce superior long-term returns as well as reduce the risk of any
holding or security. Examples of diversification would include investing in distinct property
classes like stocks, bonds, and estate. Through research and in-depth analysis, it can be
concluded that diversification is studied very relationally when it comes to the business world.
Some results are positive while other specific factors effected by diversification have been said
to have been negatively impacted.
Differences and Similarities in Diversification Research
There were many key distinctions and recurring themes in the research done regarding
diversification. I referenced the fact that diversification is studied relationally in my introduction
and that is because many of my references explained diversification in comparison to the
relationship between two concepts. There were articles comparing the effects of diversification
on the relationship between corporate governance and capital structure, loan and income, and
profit efficiency and financial stability. On the other hand, there were also sources that had more
broader topics like banks and the pandemic and how diversification influences them. Another
recurring theme that was common within my research was the method that was used when trying
to find diversified firms and how diversification was affecting them. A lot of the equations and
techniques used to find evidence were very parallel. One resource used a balanced panel data and
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then continued to use a dynamic panel regression technique based on the GMM method (Bose,
2022). Another also used a panel regression technique on a data set of 32 banks from 2000 to
2015 (Duho, 2020).
Similarities in Research Findings
Throughout my research, I found 3 different types of research findings: diversification
had a positive impact, diversification had a negative impact, and the impact cannot be
generalized because it depends on the nature of the crisis/no significant impact (Beyer, 2023).
The similarities when it comes to the claims that diversification has a positive impact is the
presence of an intense competitiveness as diversifying can help businesses stabilize by reducing
its dependence on one product or specific market. Those articles with those conclusions were
focused on debt capacity and risk regarding undiversified portfolios. The risk of a manager’s
undiversified portfolio is decreased through diversification. As a result, entrenched managers are
more likely to want higher debt capacity afforded by creditor alignment than managers in
diversified organizations who are less concerned about the financial risk associated with debt
(Mauer, 2020). This positive impact was also prevalent when the likelihood ration test is used in
terms of loans on bank performance. Harimaya puts it this way, “Considering the impact of
income diversification, some studies show a negative impact on bank performance. Our findings,
however, reveal the opposite” (Harimaya, 2021). Overall, a majority of my findings had the
conclusion that diversification had positively impacted their study of choice.
Differences in Research Findings
The main differences in my research findings were the results and conclusions of the
other articles that did not perceive diversification to have a positive impact. One of my source’s
objectives was examining the effects of diversification on firm performance when it came to
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Indian firms. A balanced panel data was used with a dynamic panel regression technique based
on the GMM method. Their findings contradicted the more positive conclusions of those in the
paragraph above. They found that as businesses diversify further into less related industries,
returns from diversification would decrease since firms used their resources at the first-best
opportunity. Additionally, scholars have argued that the marginal costs of diversification rise as
the level of diversification rises because its drawbacks will increase at a faster rate as
diversification increases (Bose, 2022). The ultimate conclusion was the there was no significant
impact that diversification had on their relational discussion. This differs to Duho who studied
bank diversification in emerging markets and found that increasing income diversity actually
reduces profit, profit efficiency, and financial stability (Duho, 2020). This surprised me as there
conclusion clearly was different than most of the articles that I had read and that is that
diversification can actually harm the company and have a negative impact. Overall, there was
definitely some diversity in the sources where their findings were not a positive but instead the
straight opposite or inconclusive.
Conclusion
Diversification can positively or negatively affect companies depending on different
factors. Diversification strategies can help reduce risk by moving into several business areas and
can help expand their operations into different business markets but can also spread a business
too thin if done in an improper fashion. Diversification will incur development and have
different sales and marketing costs. It will require extra skills and resources. If these aspects
exceed revenue and gain, it a definitely put your business at risk. However, the benefits can
outnumber the risks. Most of my findings and their results suggest that organizations should
diversify their products in order to meet customer demands as well as achieve profitability and
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References
Ji, S., Mauer, D. C., & Zhang, Y. (2020). Managerial entrenchment and capital structure: The
effect of diversification. Journal of Corporate Finance (Amsterdam, Netherlands), 65,
101505.https://www.sciencedirect.com/science/article/pii/S0929119918300877?via=ihub
- s0080
Harimaya, K., & Ozaki, Y. (2021). Effects of diversification on bank efficiency: Evidence from
shinkin banks in japan. International Review of Economics & Finance, 71, 700-717.
https://www.sciencedirect.com/science/article/pii/S1059056020302367?via=ihub - sec6
Fruehling, N., Beyer, H., & Goeddeke, A. (2023). The effect of diversification on company value
during a global health crisis: Evidence from the COVID-19 pandemic. Managerial
Finance, 49(8), 1327-1341. https://www.emerald.com/insight/content/doi/10.1108/MF-
06-2022-0251/full/html - sec004
Mitra Bose, Z., & Chakraborty, I. (2022). Effects of diversification on firm performance: An
analysis of indian firms. Indian Economic Review, 57(2), 469-511.
https://link.springer.com/article/10.1007/s41775-022-00143-y - Sec17
King Carl Tornam Duho, Onumah, J. M., & Owodo, R. A. (2020). Bank diversification and
performance in an emerging market. International Journal of Managerial Finance, 16(1),
120-138. https://www.emerald.com/insight/content/doi/10.1108/IJMF-04-2019-0137/
full/html - abstract
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