Corporate Diversification: Theory vs. Reality

In this work I review theories and empirical studies on corporate diversification by means of which I reveal numerous factors influencing a firm¿s decision to diversify as well as the diversification¿s effect on firm value. In addition to driving forces, I identify a number of firm- and industry-specific prerequisites for corporate diversification. Obviously, the trends in diversification strategy have changed over time and so have also empirical conclusions about the diversification¿s effect on firm value. Even though arguments in favor of the diversification discount seem to prevail, recently, there has been risen a vast amount of critique and evidence questioning this conclusion. Apparently, diversification per se might be considered value-maximizing strategy. Yet, diversification may result in a decrease in firm value conditional upon several factors - scale and scope of diversification, expansion strategy, firm structure as well as current business environment.