Annotated Bibliography – Models used by Firms to Leverage Diversification

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Firms to Leverage Diversification

Annotated Bibliography – Models used by Firms to Leverage Diversification

Ajay, R., & Madhumathi, R. (2012). Diversification strategy and its influence on the capital structure decisions of manufacturing firms in India. An international journal of Social science and humanity, 2(5), 421.

The article by Ajay and Madhumathi concentrates on the Indian Business segment over the last twenty years. The study’s goal is to establish the tools used by domestic and multi-national firms for financial liberalization. Ajay and Madhumathi study the effect of global and product expansion strategies on enterprise leverage choices and how such decisions influence the capital configuration of the firm. At first, the authors go through the existing literature to appreciate and comprehend the available theories on capital structure. Then, from the arguments, they describe capital diversification as the surge in industries’ number, a firm engages. Finally, the researchers conclude that international diversification enhances a firm’s debt capacity and reduces its probability of going bankrupt. Though, product diversification does not demonstrate any substantial connection with a company’s leverage.

This research is reliable because the two scholars seem to have a rich background value creation through diversification. Again, the data used is sampled from different manufacturing companies (579 international companies and 2524 local companies), and subjected to proven statistical analysis methods. The outcome indicates a constructive link between internationalization and leverage, but there is no link between the diversification of the products and a firm’s leverage. Still, the article’s findings can be biased because the samples were taken from Indian companies only.

Christiningrum, M. F. (2015). Effect of Diversification Strategy, Leverage and IOS on Multi Segment Corporate Performance in Indonesia. Mediterranean Journal of Social Sciences, 6(5 S5), 157.

The article investigates how diversification models used by companies affect their general performance. Christiningrum studies performance measurement though the use of excess value (a market performance model) and returns on assets (an accounting performance model). The researcher makes use of the market power theory, resource-based theory, and agency theory to explain what diversification is, and how it links with leverage. Various samples of companies recorded on Indonesia Stock Exchange and others from companies within all industries apart from the financial services industry are used. The study revealed that the multi-segment diversification model offers vast investment opportunities due to market and product development.

The article’s findings are reliable since they are consistent with several other researchers’ works. Again, an author who is proficient in the field of diversification has written the report. However, the study has some limitations. First, the sample used for research did not utilize the whole segment within the grouping area. Again, there is no way data from five single segment companies can be used as a source of generalized value calculation for multi-sector firms. Also, the exclusion of the financial sector, the mining sector, and the service sector makes the research derived and biased. It would have been better if Christiningrum developed a further diversified study focused on geographical sectors within and outside Indonesia. 

Galván, A., Pindado, J., & Torre, C. D. L. (2007). Diversification: value-creating or value-destroying strategy? Evidence from using panel data.

This article offers proof on how the strategy of diversification impacts the value of a company. The authors, Pindado and Torre, study the impact of diversification types and levels of on the quality or discount traded by diversified companies. As a result, they recommend the excess value model, which uses both the diversification type and level. The study comes up with quite impressive results using the generalized method of moments to estimate the model. The initial outcomes agree with the value-rescinding anticipations by showing that the diversified firms trade a cut rate in the Eurozone nations. But, after a precise examination, the results disclose a non-linear correlation between excess value and diversification, resulting in an optimum diversification level. The final outcome supports the theory that related mode of diversification generates more worth than the non-related strategy.

The study takes a unique perspective to explain whether diversification is related to value creation or destruction. The authors concentrate on twelve Eurozone countries. However, the exclusion of two countries Netherlands and Luxembourg from the sample study makes the data somehow unreliable while been used to give generalized results for the overall European area.

O’Brien, J. P., David, P., Yoshikawa, T., & Delios, A. (2014). How capital structure influences diversification performance: A transaction cost perspective. Strategic Management Journal, 35(7), 1013-1031.

The researchers aim at understanding how capital structure affects diversification performance through the use of transaction cost viewpoint. Jonathan, David, Yoshikawa, and Delios note that the existing theories suggest that debt should constrain diversification, yet predict opposing performance results.   They show the effects of leverage on diversification through the use of agency concept. And like the previous scholars, this research makes use of the foreign investment model. The article conducts experimental tests on a vast sample of Japanese companies. It establishes that firms obtain greater returns by leveraging their competencies and resources into other markets in bond debt. Likewise, the study indicates that the damaging impact of debt on the R&D intensive companies. However, there is no harm on debt for companies contracting or managing stable market investments.

Jonathan, David, Yoshikawa, and Delios appear to have a rich background on value creation through diversification. The information is well presented and understandable. The sampled data was diverse and reliable; it consisted of 1,986 firms and16, 363 observations. However, companies from highly controlled financial, public utilities, and communications sectors were excluded, limiting the reliability of the conclusions. Future research should focus more closely on a corporate’s capital structure and identify when other stakeholders matter.

References

Ajay, R., & Madhumathi, R. (2012). Diversification strategy and its influence on the capital structure decisions of manufacturing firms in India. An international journal of Social science and humanity, 2(5), 421.

Christiningrum, M. F. (2015). Effect of Diversification Strategy, Leverage and IOS on Multi Segment Corporate Performance in Indonesia. Mediterranean Journal of Social Sciences, 6(5 S5), 157.

Galván, A., Pindado, J., & Torre, C. D. L. (2007). Diversification: value-creating or value-destroying strategy? Evidence from using panel data.

O’Brien, J. P., David, P., Yoshikawa, T., & Delios, A. (2014). How capital structure influences diversification performance: A transaction cost perspective. Strategic Management Journal, 35(7), 1013-1031.

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