Diversification: A Value-Creating or Value-Destroying Strategy? Evidence from the Eurozone Countries

Résumé

In this paper, we provide evidence on how diversification strategy impacts on excess value in a sample of Eurozone firms by using the data panel methodology. Specifically, we study the effect of the levels and types of the product diversification on the premium or discount that diversified firms trade at. Preliminary results are consistent with the value-destroying expectations and show that diversified companies trade at a discount in the Eurozone countries. However, a more accurate analysis reveals that the relation between diversification and excess value is non-linear; that is, diversification strategy first creates value and then, after a certain breakpoint, destroys it, giving rise to an optimal level of diversification, pointing out to both benefits and costs of this strategy. Moreover, our results show that related diversification is more value-creating than non-related diversification, and that non-related diversification is likely to turn into a value-destroying strategy at lower levels than related diversification.