Does Business Diversification Affect Performance?: Some Fur

In a recent article, Michel and Shaked (1984) examine how performance is affected by a firm's related diversification as opposed to unrelated diversification. To determine the degree to which a firm's operations are related, Michel and Shaked use a related ratio defined as the proportion of a firm's revenues attributable to its largest group of related businesses. They find a positive and significant relationship between the degree of internal diversification and performance. Extending Michel and Shaked's work by controlling for possible industry effects and firm size shows that, at least for a small sample of firms, when Michel and Shaked diversification measure is used, those firms that have diversified in nonrelated businesses have provided higher risk-adjusted returns to shareholders. When an alternative measure of diversification is used, the results show that diversification does not affect performance. These results suggest difficulty in the assessment of the degree of diversification.