Firm performance, corporate diversification, and recession: evidence from Asia

This thesis reports a detailed study of the effect of business diversification on firm performance in the ASEAN' s (Association of South Asian Nations) economy over the period 2003-2014. In particular, this study investigates whether there is a non-linear relation between business diversification and firm performance, and therefore, whether there is an optimal level of business diversification.

Based on multiple regression analyses, the empirical findings of this study show that firm performance is sensitive to the selection of performance measures, where multiple performance measures have been employed in this study. Furthermore, empirical findings of this thesis show that diversification creates value for firms in most of the ASEAN countries when accounting-based firm performance measures are employed (ROA and ROE). In contrast, the diversification premium disappears in most economies if market-based performance measures (Tobin' s Q and excess value) are used as performance indicators. Apart from ordinary least square (OLS) regression analyses, two-stage least square (2SLS) analyses are also employed to address endogeneity concerns. Interestingly, when endogenous variables are controlled (such as investment opportunity and foreign operation), business diversification is found to create value in most ASEAN countries for both accounting and market-based approaches. The endogeneity test is however sensitive to the classification of diversified and single-line firms.

When the level of diversification (in terms of business segments) is investigated, an inverted U-shaped non-linear relation is found between business diversification and firm performance. The turning point on the non-linear curve shows that the process of diversification creates value up to a certain level, after which performance gradually decreases-indicating the existence of an optimal level of business diversification. Finally, this study finds both diversified and single-line firms are negatively affected by the global financial crisis (2007-2009), but that single-line firms in the ASEAN' s economy were more severely affected. The study is expected to provide solid guidance and insight on investment opportunities and operational strategies for both investors and enterprises.