The Dark Side of Firm Diversity: An Empirical Examination of the Impact of Firm Diversity on Resource Allocation Efficiency in Multidivisional Firms

The Dark Side of Firm Diversity: An Empirical Examination of the Impact of Firm Diversity on Resource Allocation Efficiency in Multidivisional Firms

Blog Article

There is a renewed debate about whether multidivisional firms allocate resources efficiently across their Bone Support Formulas divisions.This paper contributes to the literature on this debate by developing and testing a conceptual framework that links resource allocation efficiency to three forms of firm-level diversity: diversity in industry-specific knowledge, diversity in industryspecific investment opportunities, and diversity in operations.Regression analysis of a large sample of multidivisional firms shows that resource allocation efficiency tends to decrease as diversity in either industry-specific knowledge or industry-specific investment opportunities increases.Moreover, it appears that the negative relationship between the diversity in industry-specific investment opportunities and allocation efficiency weakens and may even turn positive when the diversity in industry-specific knowledge is low.On the other hand, the diversity in operations does not appear to affect allocation efficiency.

These results are robust to the potential bias due to Flywheel W/ Bracket Bearing sample selection.Combined with related theory, the results suggest that firm diversity could have either a detrimental or a positive effect on a firm’s performance.