Title: A causal study of diversification's joint effect on firm performance and risk

Authors: Zahra Faraji; Adam Fleischhacker

Addresses: Department of Financial Service Analytics, Alfred Lerner College of Business and Economics, University of Delaware, USA ' Department of Financial Service Analytics, Alfred Lerner College of Business and Economics, University of Delaware, USA

Abstract: This paper estimates the causal effect that firm diversification strategies have on the joint distribution of firm performance and risk. By applying Bayesian causal methods to a dataset of US-based firms, we show and describe how diversification leads to heterogeneous effects on a joint model of firm performance and risk. Across firms, diversification plays a mean-reverting role on performance, but does appear to reduce risk for most firms. Interestingly though, the riskiest firms are shown to become even riskier if choosing to diversify. In addition to these global effects, the paper presents methods for individual firms to assess the potential results of their own diversification possibilities. Our estimates correct for bias introduced by the more prevalent non-causal methods that make up the bulk of existing literature. Lastly, several theoretical and practical implications are provided by this study.

Keywords: diversification strategy; causal inference; firm risk; firm performance; joint effect; heterogeneous effect.

DOI: 10.1504/IJBDA.2023.133299

International Journal of Business and Data Analytics, 2023 Vol.2 No.3, pp.239 - 263

Received: 24 Oct 2022
Accepted: 23 Dec 2022
Published online: 11 Sep 2023 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article