What is the Optimal Level of Diversification for Firm Performance?

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What is the Optimal Level of Diversification for Firm Performance?
Stefka Nenkova, Student (University), Netherlands, Premium Member
The relationship between diversification and financial performance has been a topic of research for many years but is yet to reach a consensus. However, there are several suggestions on how diversification could influence a company's performance, depending on the type or level of diversification:
  • LINEAR MODEL – Gort (1962) argues that diversification has a linear and positive influence on performance based on the concepts of market power advantages (involving tactics like predatory pricing or reciprocal buying and selling) and internal market efficiencies (an argument pointing that a diversified firm is more flexible in capital formation since it has an access to internally generated sources in addition to any other external sources and could “shift” capital between business units in its portfolio). However, albeit their conceptual appeal, this notion has little empirical evidence as it yields mixed results in practice.


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