Corporate diversification and firm performance : The effect of the global financial crisis on diversification in India

Abstract: This paper investigates the impact of diversification and the financial crisis on firm performance in India.The dataset of this paper is focused on Indian publicly listed firms between 2006 and 2012. By analyzingaccounting-based and market-based measures of firm performance, this study tries to explain the factorsthat influences the costs and benefits of diversified firms compared to non-diversified firms. This studyfound that diversified firms have on average a higher firm performance than non-diversified firms.During the global financial crisis, the performance of both diversified and non-diversified firms in Indiadeteriorated caused by a meltdown of global economic activities. This study does not find evidence thatdiversified firms perform relatively better than non-diversified firms during crisis times. Diversification isexpected to be more beneficial in the absence of well-developed and integrated capital markets due theeffects of “more money” and “smarter money”, arising from an increased efficiency of the internalcapital market. The analysis gives an impression that the total number of diversified firms increased afterthe crisis.