International Journal of

ADVANCED AND APPLIED SCIENCES

EISSN: 2313-3724, Print ISSN: 2313-626X

Frequency: 12
line decor
  
line decor

 Volume 7, Issue 6 (June 2020), Pages: 15-21

----------------------------------------------

 Original Research Paper

 Title: Do firms have a target diversification ratio? Evidence from the Tunisian context

 Author(s): Kouki Marouan *

 Affiliation(s):

 Faculty of Computing and IT, Northern Border University, Arar, Saudi Arabia

  Full Text - PDF          XML

 * Corresponding Author. 

  Corresponding author's ORCID profile: https://orcid.org/0000-0001-5699-0910

 Digital Object Identifier: 

 https://doi.org/10.21833/ijaas.2020.06.003

 Abstract:

This study explores the diversification strategy adjustment mechanisms of firms that experience substantial changes in their activity for 30 Tunisian companies listed on the Tunis Stock Exchange for 15 years over the period 1997-2011. Adjustments appear to be asymmetric among firms with large increases and those with large decreases in diversification ratios. The different adjustments are due to differences in diversification targets. Speeds of adjustment are found to be affected by firm characteristics. In addition, we show that the Tunisian firms adjust their diversification ratios to a target ratio. Indeed, taking into account the fundamental variables that might explain the strategic orientation of a firm, namely the size, age, free cash flow, and profitability, we have shown that the speed of adjustment is on average between 4 and 5 years. The hypothesis of a partial adjustment is thus verified that it is possible to set target levels diversification. 

 © 2020 The Authors. Published by IASE.

 This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).

 Keywords: Diversification, Target, Partial adjustment, Entropy

 Article History: Received 22 October 2019, Received in revised form 2 March 2020, Accepted 3 March 2020

 Acknowledgment:

No Acknowledgment.

 Compliance with ethical standards

 Conflict of interest: The authors declare that they have no conflict of interest.

 Citation:

 Marouan K (2020). Do firms have a target diversification ratio? Evidence from the Tunisian context. International Journal of Advanced and Applied Sciences, 7(6): 15-21

 Permanent Link to this page

 Figures

 No Figure

 Tables

 Table 1 Table 2

----------------------------------------------

 References (40) 

  1. Amihud Y and Lev B (1981). Risk reduction as a managerial motive for conglomerate mergers. The Bell Journal of Economics, 12(2): 605-617. https://doi.org/10.2307/3003575   [Google Scholar]
  2. Barney JB (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1): 99-120. https://doi.org/10.1177/014920639101700108   [Google Scholar]
  3. Barney JB and Hesterly WS (2008). Strategic management and competitive advantage: Concepts and cases. Prentice-Hall, Upper Saddle River, USA.   [Google Scholar]
  4. Barwise P and Robertson T (1992). Brand portfolios. European Management Journal, 10(3): 277-285. https://doi.org/10.1016/0263-2373(92)90021-U   [Google Scholar]
  5. Berger P and Ofek E (1995). Diversification’s effect on firm value. Journal of Financial Economics, 37(1): 39-65. https://doi.org/10.1016/0304-405X(94)00798-6   [Google Scholar]
  6. Bettis RA (1981). Performance differences in related and unrelated diversified firms. Strategic Management Journal, 2(4): 379-393. https://doi.org/10.1002/smj.4250020406   [Google Scholar]
  7. Bodnar GM, Tang C, and Weintrop J (1999). Both sides of corporate diversification: The value impacts of geographic and industrial diversification. Working Paper, John Hopkins University, Baltimore, USA. https://doi.org/10.2139/ssrn.217869   [Google Scholar]
  8. Buckley PJ and Casson M (1976). The future of the multinational enterprise. Macmillan, London, UK. https://doi.org/10.1007/978-1-349-02899-3   [Google Scholar]
  9. Capar N and Kotabe M (2003). The relationship between international diversification and performance in service firms. Journal of International Business Studies, 34(4): 345-355. https://doi.org/10.1057/palgrave.jibs.8400036   [Google Scholar]
  10. Choi K, Kang KH, Lee S, and Lee K (2011). Impact of brand diversification on firm performance: A study of restaurant firms. Tourism Economics, 17(4): 885-903. https://doi.org/10.5367/te.2011.0059   [Google Scholar]
  11. Collin SO and Bengtsson L (2000). Corporate governance and strategy: A test of the association between governance structures and diversification on Swedish data. Corporate Governance: An International Review, 8(2): 154-165. https://doi.org/10.1111/1467-8683.00192   [Google Scholar]
  12. Datta DK, Rajagopalan N, and Rasheed AM (1991). Diversification and performance: Critical review and future directions. Journal of Management Studies, 28(5): 529-558. https://doi.org/10.1111/j.1467-6486.1991.tb00767.x   [Google Scholar]
  13. Davis JH, Schoorman FD, and Donaldson L (1997). Toward a stewardship theory of management. Academy of Management Review, 22(1): 20-47. https://doi.org/10.5465/amr.1997.9707180258   [Google Scholar]
  14. Denis DJ, Denis DK, and Sarin A (1997). Agency problems, equity ownership, and corporate diversification. Journal of Finance, 52(1): 135-160. https://doi.org/10.1111/j.1540-6261.1997.tb03811.x   [Google Scholar]
  15. Denis DJ, Denis DK, and Sarin A (1999). Agency theory and the influence of equity ownership structure on corporate diversification strategies. Strategic Management Journal, 20(11): 1071-1076. https://doi.org/10.1002/(SICI)1097-0266(199911)20:11<1071::AID-SMJ70>3.0.CO;2-G   [Google Scholar]
  16. Denis DJ, Denis DK, and Yost K (2002). Global diversification, industrial diversification, and firm value. The Journal of Finance, 57(5): 1951-1979. https://doi.org/10.1111/0022-1082.00485   [Google Scholar]
  17. Eisenhardt KM (1989). Making fast strategic decisions in high-velocity environments. Academy of Management Journal, 32(3): 543-576. https://doi.org/10.5465/256434   [Google Scholar]
  18. Fauver L, Houston JF, and Naranjo A (2004). Cross-country evidence on the value of corporate industrial and international diversification. Journal of Corporate Finance, 10(5): 729-752. https://doi.org/10.1016/S0929-1199(03)00027-0   [Google Scholar]
  19. Goranova M, Alessandri TM, Brandes P, and Dharwadkar R (2007). Managerial ownership and corporate diversification: A longitudinal view. Strategic Management Journal, 28(3): 211-225. https://doi.org/10.1002/smj.570   [Google Scholar]
  20. Gourlay A and Seaton J (2004). The determinants of firm diversification in UK quoted companies. Applied Economics, 36(18): 2059-2071. https://doi.org/10.1080/0003684042000295610   [Google Scholar]
  21. Hill CW and Snell SA (1988). External control, corporate strategy, and firm performance in research intensive industries. Strategic Management Journal, 9(6): 577-590. https://doi.org/10.1002/smj.4250090605   [Google Scholar]
  22. Hoskisson RE and Hitt MA (1990). Antecedents and performance outcomes of diversification: A review and critique of theoretical perspectives. Journal of Management, 16(2): 461-509. https://doi.org/10.1177/014920639001600210   [Google Scholar]
  23. Jensen MC (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2): 323-329.   [Google Scholar]
  24. Jensen MC and Meckling WH (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4): 305-360. https://doi.org/10.1016/0304-405X(76)90026-X   [Google Scholar]
  25. Jones GR and Hill CWL (1988). Transaction cost analysis of strategy-structure choice. Strategic Management Journal, 9(2): 159-172. https://doi.org/10.1002/smj.4250090206   [Google Scholar]
  26. Kotabe M, Srinivasan SS, and Aulakh PS (2002). Multinationality and firm performance: The moderating role of R&D and marketing capabilities. Journal of International Business Studies, 33(1): 79-97. https://doi.org/10.1057/palgrave.jibs.8491006   [Google Scholar]
  27. Lane PJ, Cannella AA, and Lubatkin MH (1999). Ownership structure and corporate strategy: One question viewed from two different worlds. Strategic Management Journal, 20(11): 1077-1086. https://doi.org/10.1002/(SICI)1097-0266(199911)20:11<1077::AID-SMJ68>3.0.CO;2-O   [Google Scholar]
  28. Lane PJ, Cannella Jr AA, and Lubatkin MH (1998). Agency problems as antecedents to unrelated mergers and diversification: Amihud and Lev reconsidered. Strategic Management Journal, 19(6): 555-579. https://doi.org/10.1002/(SICI)1097-0266(199806)19:6<555::AID-SMJ955>3.0.CO;2-Y   [Google Scholar]
  29. Lang LHP and Stulz RM (1994). Tobin’s q, corporate diversification, and firm performance. Journal of Political Economy, 102(6): 1248-1281. https://doi.org/10.1086/261970   [Google Scholar]
  30. Lubatkin M and Rogers RC (1989). Diversification, systematic risk, and shareholder return: A capital market extension of Rumelt's 1974 study. Academy of Management Journal, 32(2): 454-465. https://doi.org/10.2307/256370   [Google Scholar]
  31. Morgan NA and Rego LL (2009). Brand portfolio strategy and firm performance. Journal of Marketing, 73(1): 59-74. https://doi.org/10.1509/jmkg.73.1.59   [Google Scholar]
  32. Palepu K (1985). Diversification strategy, profit performance and the entropy measure. Strategic Management Journal, 6(3): 239-255. https://doi.org/10.1002/smj.4250060305   [Google Scholar]
  33. Ramaswamy K, Li M, and Veliyath R (2002). Variations in ownership behavior and propensity to diversify: A study of the Indian corporate context. Strategic Management Journal, 23(4): 345-358. https://doi.org/10.1002/smj.227   [Google Scholar]
  34. Rijamampianina R, Abartt R, and February Y (2003). A framework for concentric diversification through sustainable competitive advantage. Management Decision, 41(4): 362-371. https://doi.org/10.1108/00251740310468031   [Google Scholar]
  35. Rumelt RP (1974). Strategy, structure, and economic performance. Harvard University Press, Cambridge, USA.   [Google Scholar]
  36. Rumelt RP (1982). Diversification strategy and profitability. Strategic Management Journal 3(4): 359-369. https://doi.org/10.1002/smj.4250030407   [Google Scholar]
  37. Sambharya RB (1995). The combined effect of international diversification and product diversification strategies on the performance of US-based multinational corporations. MIR: Management International Review, 35(3): 197-218.   [Google Scholar]
  38. Shleifer A and Vishny RW (1986). Large shareholders and corporate control. Journal of Political Economy, 94(3, Part 1): 461-488. https://doi.org/10.1086/261385   [Google Scholar]
  39. Singh M, Mathur I, and Gleason KC (2004). Governance and performance implications of diversification strategies: Evidence from large US firms. Financial Review, 39(4): 489-526. https://doi.org/10.1111/j.0732-8516.2004.00086.x   [Google Scholar]
  40. Zhang Y and Li X (2006). Ownership structure and corporate diversification. Business and Politics, 8(1): 1-19. https://doi.org/10.2202/1469-3569.1144   [Google Scholar]