Strategic Management

http://soq.sagepub.
com/
Strategic Organization
http://soq.sagepub.com/content/11/4/347
The online version of this article can be found at:
DOI: 10.1177/1476127013481447
2013 11: 347 originally published online 8 May 2013 Strategic Organization
Tyson B Mackey and Jay B Barney
diversification and payout as opportunities forgone when reinvesting in the firm
Incorporating opportunity costs in strategic management research: The value of
Published by:
http://www.sagepublications.com
can be found at: Strategic Organization Additional services and information for
http://soq.sagepub.com/cgi/alerts Email Alerts:
http://soq.sagepub.com/subscriptions Subscriptions:
http://www.sagepub.com/journalsReprints.nav Reprints:
http://www.sagepub.com/journalsPermissions.nav Permissions:
http://soq.sagepub.com/content/11/4/347.refs.html Citations:
What is This?
- May 8, 2013 OnlineFirst Version of Record
- Nov 7, 2013 Version of Record >>

at Alexandru Ioan Cuza on May 14, 2014 soq.sagepub.com Downloaded from at Alexandru Ioan Cuza on May 14, 2014 soq.sagepub.com Downloaded from
Strategic Organization
11(4) 347 363
The Author(s) 2013
Reprints and permissions:
sagepub.co.uk/journalsPermissions.nav
DOI: 10.1177/1476127013481447
soq.sagepub.com
Incorporating opportunity costs in
strategic management research:
The value of diversification and
payout as opportunities forgone
when reinvesting in the firm
Tyson B Mackey
California Polytechnic State University, USA
Jay B Barney
The University of Utah, USA
Abstract
This article explores the theoretical and empirical implications of incorporating forgone opportunities in
strategic management research. Drawing on the well-studied literature examining whether firms should
reinvest in focused businesses or pursue alternatives of diversifying and/or paying out excess cash to
shareholders, hypotheses are developed for when diversification and payout policy, as the opportunity
costs of reinvesting in the firms original businesses, will present firms with higher and lower opportunity
costs. Empirical results suggest that the value of reinvestment in existing businesses is higher for firms facing
lower opportunity costs of forgoing other alternatives (e.g. diversification and paying out) than for firms
that have much higher opportunity costs of forgoing these same alternatives. Implications for incorporating
opportunity costs into the diversification literature and the broader strategic management literature are
also explored.
Keywords
Diversification, firm performance, opportunity costs
Much strategy research focuses on the impact of a firms strategic choices on its performance. The
typical empirical structure of this work is straightforward: Scholars apply some measure of the
extent to which a firm is implementing a particular strategy, some measure of firm performance,
and thencontrolling for environmental and organizational contingencies identified by relevant
theoryexamine the empirical relationship between a strategy and performance.
Corresponding author:
Tyson B Mackey, Assistant Professor Management, Orfalea College of Business (Cal Poly), California Polytechnic State
University, 1 Grand Avenue, San Luis Obispo, CA 93407, USA.
Email: tymackey@gmail.com; tbmackey@calpoly.edu
481447SOQ11410.1177/1476127013481447Strategic OrganizationMackey and Barney
2013
Article
at Alexandru Ioan Cuza on May 14, 2014 soq.sagepub.com Downloaded from
348 Strategic Organization 11(4)
While widely adopted, this approach to strategic management research often fails to consider
the strategic options forgone when a firm chooses a particular strategy. Of course, to some degree,
one counterfactual strategy is implicit in every one of these modelsthe alternative of not choos-
ing the strategy being studied. In some research settings, this simple way of thinking about the
strategy not chosen is sufficient.
However, in other research settings, assuming that the only alternative to choosing and imple-
menting a particular strategy is to not choose and implement that strategy is not sufficiently mean-
ingful. This is especially the case when there are several viable alternatives to a particular strategy.
In these settings, lumping together all the alternative strategies into a single alternative implicit
counterfactual strategy is not sufficient. Knowing the value of the alternatives forgone can have a
significant impact on how one interprets the relationship between the strategy chosen and firm
performance. For example, if, say, a strategy of cost leadership creates, on average, a 20% positive
return for firms, then research that only examines the relationship between cost leadership and firm
performance will suggest that cost leadership creates value most of the time. However, what if a
different strategynot just the absence of the first strategy, but an economically viable alterna-
tivegenerates a 50% positive return for firms? In this case, this alternative strategy might be
product differentiation. Relative to product differentiation, a cost leadership strategy sacrifices a
great deal of firm value, even though cost leadership does create value. Put differently, it is difficult
to fully understand the value created by a firms strategy unless we also understand the value of
strategies not chosen by a firm. The value of strategic opportunities forgone is, of course, the
opportunity costs associated with the strategy actually chosen by a firm.
A growing number of strategy scholars have begun to recognize the importance, in principle, of
incorporating opportunity costs in strategic management research (Levinthal and Wu, 2010).
However, one of the challenges associated with incorporating opportunity costs into this research is
that it can be quite difficult to identify the opportunities forgone when a firm chooses to implement a
particular strategy. It can be even more difficult to estimate the value of these opportunities forgone.
These challenges are one reason why this article examines the value of opportunities forgone in
a very well-studied part of the literaturedecisions about whether to reinvest in a focused busi-
ness, on the one hand, or pursue alternatives of diversifying and/or paying out excess cash to
shareholders (through a stock repurchase and/or dividend program), on the other hand. While there
are multiple decades of work in strategic management studying the corporate diversificationfirm
performance linkageand while much is known about the value of related and unrelated diversi-
fication (Bettis, 1981; Grant, 1988; Hill et al., 1992; Markides and Williamson, 1994; Miller, 2004;
Palich et al., 2000; Rumelt, 1982), less is known about the value of forgone opportunitiessuch as
reinvestment in existing businesseswhen firms diversify.
This article shows that the value of reinvestment in existing businesses is higher for firms facing
lower opportunity costs of forgoing other alternatives (e.g. diversification and paying out) than for firms
that have much higher opportunity costs of forgoing these same alternatives. The results suggest that
overlooking the value of alternatives to reinvestmentin particular, the value of diversifying into new
businesses and of paying out a firms free cash flow to its shareholders through dividends or stock
repurchasesleaves out an important component in our understanding of the returns to reinvestment.
The opportunity costs of reinvestment
The opportunity costs associated with reinvesting in a firms current businesses depend upon how
economically attractive those businesses are, relative to the firms other alternatives (i.e. diversifi-
cation and paying out to shareholders). Each of these alternatives will be explored in turn.
Mackey and Barney 349
Diversification as an alternative to reinvestment
If a firms core businesses are growing rapidly or if a firm has a sustained competitive advan-
tage in those businesses, then the opportunity cost of not investing in these businesses can be
quite high, often higher than returns that a firm might expect from diversification. However, if
a firms core businesses are not growing or if a firm has no sustained advantages in its core
businesses, then the opportunity costs of not investing in these businesses can be quite low,
especially relative to diversification. Indeed, prior work has suggested that one of the main
reasons firms begin to pursue a diversification strategy is that returns in their current business
activities are diminishing (Rumelt, 1982; Stimpert and Duhaime, 1997). Faced with these reali-
ties, firms may seek new profit opportunities in new businesses. This is especially likely for
firms that are generating free cash flow in industries with limited prospects for growth (Gomes
and Livdan, 2004; Jensen, 1986; Maksimovic and Phillips, 2002; Montgomery and Wernerfelt,
1988; Rumelt, 1977).
Empirical support for this view of diversification has been mixed. Although there is strong
support in the literature to suggest that diversification that builds upon economies of scope
(e.g. resource sharing) that outside equity holders cannot duplicate on their own (e.g. through
markets or contractual means) can create value for a firms shareholders (Barney, 1988; Bettis,
1981; Hill et al., 1992; Hoskisson, 1987; Markides and Williamson, 1994; Palich et al., 2000;
Rumelt, 1982; Teece, 1980, 1982), there is other research suggesting that diversification strat-
egies, on average, destroy economic value (Montgomery and Wernerfelt, 1988), and that in
fact, diversified firms, on average, trade at a discount compared to a portfolio of focused firms
operating in the same industries (Berger and Ofek, 1995; Comment and Jarrell, 1995; Lang
and Stulz, 1994).
However, several scholars have questioned this diversification discount result, arguing that
despite the fact that diversification is associated with lower firm values, it is not the act of diversi-
fication that destroys value but rather the circumstances (such as increasing firm maturity) that led
the firm to need an escape from poorly performing businesses (or industries) that lower the firms
value (Campa and Kedia, 2002; Gomes and Livdan, 2004; Villalonga, 2004). This research finds
that prior diversification discount research suffers from a variety of estimation problemsespe-
cially endogeneity problemsand that when these problems are addressed, the diversification
discount disappears, sometimes replaced by a modest diversification premium (Campa and Kedia,
2002; Miller, 2004; Villalonga, 2004).
These endogeneity correction models add some indirect support for the idea that when the
opportunity cost of reinvestment in existing businesses is lower than the opportunity costs of diver-
sification, diversification becomes a more attractive choice; however, prior work has not directly
tested this idea since this was not their research question of interest. Rather, prior work has focused
on developing and testing theory for the various situations in which diversification may or may not
create value and not on how the value of forgone alternatives may change the appeal of diversifica-
tion for firms.
This article directly tests the idea that when firms are facing diminishing returns in their current
business, the opportunity costs of reinvestment are lower, and the returns to diversification increase.
This is summarized with the following hypothesis:
Hypothesis 1. The returns to diversification increase when reinvestment in existing businesses
is less attractive.
Payout as an alternative to reinvestment
Of course, diversification is not the only alternative for firms facing diminishing performance in
their ongoing businesses. These firms may instead elect to initiate a payout to shareholders, either
in the form of dividends or stock repurchases. Thus, if opportunity costs are the value of the best
alternative forgone by a firm, then initiating payout might also be another potential opportunity
cost of either reinvestment or diversification.
Indeed, prior research also suggests that diversification and payout often have similar anteced-
ent conditions. One of the most widely cited determinants of a firms decision to payout is firm
maturityfirms with limited growth potential in their current business are more likely to payout
than those in high growth industries (Grullon et al., 2002).
In such a setting, returning cash to shareholders is often a firms best option for many reasons.
First, prior research shows that initiating a payout strategy is consistently, and positively, correlated
with firm value (Allen and Michaely, 2005; Ikenberry et al., 1995; Easterbrook, 1984). Second,
paying out cash to shareholders signals to shareholders expected future profitability as well as the
reduced risk that comes with a maturing firm (Grullon et al., 2002). Finally, paying out is valuable
to shareholders both in terms of the value of money that they receive by virtue of the payout but
also because dividend payments, in particular, may indicate that managers are not squandering the
firms free cash flow through overinvestment (Allen and Michaely, 2005). Therefore, although
payout conveys potentially negative information about growth opportunities in the firms core
businesses (Grullon et al., 2002), it is still thought to be associated with higher firm values because
paying out also signals reduced risk, future profitability, and reduced agency concerns. Comparing
the value created by payout to the value created by reinvestment suggests the following
hypothesis:
Hypothesis 2. The returns to initiating payout increase when reinvestment in existing businesses
is less attractive.
Diversification versus payout as alternatives to reinvestment
Diversification has been critiqued in the past as evidence of agency concerns (Denis et al., 1997;
Jensen, 1986), and some have said that it would be better if the cash used for diversification were
returned to shareholders (Jensen, 1986). These critiques imply that in addition to being opportunity
costs of reinvestment, diversification and payout are opportunity costs of each other as well, and
both must be considered in this study. Reasonable arguments can be made for why either diversifi-
cation or payout might be the optimal alternative to reinvestment.
Diversification has some advantages relative to payout as an alternative to reinvestment. For
example, diversification can create value by leveraging resources that are not fully deployed. In
general, diversification can create value through economies of scope that cannot be replicated by
returning cash to shareholders. Additionally, while firms can often seek external funding for diver-
sification, it rarely makes sense for firms to do so for payout, so firms with limited cash will be
constrained in their opportunities for initiating payout.
However, while diversification has the potential for greater value creation than initiating pay-
out, it also carries greater risks than dividends or stock repurchases. For example, expected econo-
mies of scope may fail to materialize or the new business entered into through diversification may
be less valuable than expected. The extent to which firms will actually be able to realize economies
of scope will often depend on the degree of cooperation and coordination among business units as
well as the firms ability to minimize other forms of diseconomies of organizational scale (Goold
and Campbell, 1998; Jones and Hill, 1988; Nayyar, 1992). Inefficient internal capital markets
(Hoskisson and Turk, 1990; Scharfstein and Stein, 2000; Shin and Stulz, 1998; Stein, 1997) and
agency conflicts (Jensen, 1986; Stulz, 1990; Rajan, Servaes, and Zingales, 2000) can also limit a
firms ability to create value through diversification.
These arguments lead to two competing hypotheses:
Hypothesis 3a. The returns to diversification will be greater than the returns to initiating payout
when reinvestment in existing businesses is less attractive.
Hypothesis 3b. The returns to initiating payout will be greater than the returns to diversification
when reinvestment in existing businesses is less attractive.
Methods
Data and sample
As stated at the outset, the purpose of this article is to incorporate opportunity costs into the strate-
gic management research model in the setting of a firms decision to reinvest in a focused business
or pursue its strategic alternatives of either diversifying or initiating payout. At least one way to do
this is to compare the returns to reinvestment, diversification, and payout across samples of firms
with varying levels of opportunity costs to reinvestment. This is the approach of this article.
Two samples were created. The first, a baseline sample, represents a broad cross section of firms
growing at various rates. The second, a restricted sample, represents a subset of the baseline sample
restricted to firms facing less attractive growth opportunities. This is operationalized as firms expe-
riencing slowing growth prior to the decision to diversify or payout was constructed. The returns
to reinvestment, diversification, and payout for firms in the baseline sample are compared to the
returns to firms in the restricted sample experiencing slowing growth to test our hypotheses. More
details on the construction of these samples follow.
First, the baseline sample was constructed from the Compustat Industry Segment file using all
the typical sample construction conventions used in the literature comparing diversified firms with
reinvesting (single-segment) firms.
1
Beyond these typical conventions, firms are only included in
the sample if there are observations for which the firm was neither diversified nor paying out so
that the effects of initiating diversification from the effects of choosing to reinvest in existing busi-
nesses can be statistically isolated. This restriction also makes it possible to isolate the effects of
initiating diversification from the effects of initiating payout. Hence, firms in the sample fit one of
two profiles: (1) firms that never choose to initiate diversification or payout or (2) firms that at
some point were not engaged in diversification or payout but chose to engage in one or both of
those activities. For this latter group, observations past the first year that the firm chose to diversify
or payout were not included.
This baseline sample includes 23,804 observations in 5671 firms that matched all these sample
selection criteria. These observations can be broken down descriptively into four categories: diver-
sifying (708 observations), initiating a payout (695 observations), diversifying and initiating a
payout in the same year (20 observations), or reinvestcontinue undiversified and nonpayout
status (22,381 observations). It is interesting to note that only 20 undiversified firms in the
Compustat file chose to both initiate diversification and initiate a payout in the same year. This
suggests that while firms are not constrained from becoming diversified and initiating payout in the
same year, in practice, firms very rarely choose to do so. The fact that these two choices are
essentially mutually exclusive enhances our ability to isolate the effects of initiating diversification
from the effects of initiating payout.
Second, the restricted sample is constructed by only including firms from the baseline sample
experiencing slowing growth, defined as the condition in which the growth rate (change in assets)
from time period t-2 to t-1 is less than the growth rate from time period t-3 to t-2. As noted previ-
ously, this restricted sample represents a set of firms in which reinvestment has become relatively
less attractive, and the returns to reinvestment, diversification, and payout for these firms will be
compared to the respective returns for the baseline sample. This restricted sample includes 7892
observations in 3194 firms. The observations in the restricted sample can be broken down descrip-
tively into four categories: diversifying (211 observations), initiating a payout (219 observations),
diversifying and initiating a payout in the same year (8 observations), or reinvestcontinue undi-
versified and nonpayout status (7454 observations).
Dependent variable
Previous research comparing multisegment and focused firms has used a variety of accounting
measures (such as return on assets (ROA)) or market measures (such as Tobins q) of firm value as
a dependent variable (Hoskisson et al., 1993; Lang and Stulz, 1994). However, the limitations of
these measures of firm value are now becoming more widely understood (Berger and Ofek, 1995;
Palich et al., 2000). Accounting measures are subject to managerial manipulations (Palich et al.,
2000), do not account for risk (Hoskisson et al., 1993), and are not forward looking. Market meas-
ures such as Tobins q are an improvement over accounting measures, as they incorporate forward-
looking market valuations; however, Tobins q has its limitations as well. For example, an increase
in dividends will almost always increase Tobins q since reducing the cash in the firm will decrease
the book value of the firmthe denominator of Tobins q. Additionally, and perhaps more impor-
tantly, for the current context, it is difficult to adjust Tobins q for industry because data are not
available for segment-level market values or replacement values (Berger and Ofek, 1995). In the
current context, this is particularly critical because the value of each segment within a firm is heav-
ily dependent on the industry in which it competes.
To avoid these measurement problems, this article adopts an approach to measure firm value
developed specifically in the context of diversification: excess value (Berger and Ofek, 1995;
LeBaron and Speidell, 1987; Zuckerman, 2000). Conceptually, excess value is defined as the
degree to which a diversified firms value exceeds that of a portfolio of single-segment firms com-
peting in the same industries as the diversified firm.
Excess value is measured by the log of the ratio of the firms value (total firm capital) and the
sum of the imputed values of its segments as single-segment firms. Total firm capital is measured
as the sum of a firms market value of equity, long-term and short-term debt, and preferred stock.
A segments imputed value is calculated by multiplying its sales by the median value for single-
segment firms in the segments industry (the most restrictive Standard Industrial Classification
(SIC) groupingfour digit, three digit, or two digitthat includes at least five firms
2
). Using the
imputed values of each segment, the imputed value of the corporation is calculated as the sum of
each of its segments imputed values.
Since this dependent variable is in log form, a negative excess value indicates that the firm has
a lower value than its imputed value, that is, a diversified firm is trading at a discount relative to a
portfolio of focused firms in the same industries. A positive excess value indicates that the firm has
a higher value than its imputed value, that is, a diversified firm is trading at a premium relative to
the portfolio of focused firms. Extreme excess values of more than 1.386 or less than 1.386 (i.e.
the ratio of actual value to imputed value is greater than 4 or less than 0.25) are eliminated from the
sample.
Independent variables
Initiating diversification. Firms are identified as diversifying if Compustat reports multiple segments
for the firm in a given year. This variable is an indicator variable set equal to one if the firm is
diversified and zero otherwise. Thus, for firms in the sample, this variable is equal to zero for all
the years the firm is undiversified, leading up to the firms choice to diversify, in which the variable
would then be set equal to one.
Initiating payout. Firms are identified as initiating paying out if Compustat reports positive values
for dividends or stock repurchases. This variable is an indicator variable set equal to one if the firm
is paying out either dividends or stock repurchases and zero otherwise. Most firms that pay a divi-
dend also repurchase stock; therefore, it is not essential in this study to differentiate between the
two forms of payout.
Discrete measures of diversification and payout are used instead of continuous measures to be
in line with the focus of this articleto compare the effects of the initial diversification choice to
the alternative choice of initiating payout. Continuous measures such as entropy, in the case of
diversification, or the actual dollar amount spent on payout (or the dollar amount as a percentage
of sales, assets, etc.) would be more appropriate in an examination of the relationship between the
level of diversification or level of payout and the firms value.
Control variables
Firm characteristics. Consistent with the empirical literature comparing reinvesting and diversifying
firms (e.g. Miller, 2004, 2006), several firm-level control variables are used in the analysis: firm
size is measured by the log of assets and its square, profitability is measured as return on sales
(ROS), investment is measured as capital expenditure divided by sales, leverage (measured as the
debt to asset ratio), research intensity is measured as the ratio of R&D expenditure to sales,
3
and a
firm-level fixed effect. Year dummies are also included but not reported in the results.
Selection terms. This article also controls for both the firms propensity to diversify and its propen-
sity to initiate payout, generating sample selection terms to control for the endogeneity of both the
diversification and payout decisions (Hamilton and Nickerson, 2003). Recent empirical work esti-
mating the value of diversification has taken the approach of correcting for the endogeneity of the
diversification decision (Campa and Kedia, 2002; Miller, 2006) using Heckmans two-step model
(1979) with treatment effects. This article adopts a similar approach to previous works, extending
the model to account for both of the free cash flow allocation decisions that a firm faces: the deci-
sion to diversify and the decision to initiate payout. Thus, instead of correcting for the endogeneity
of one firm decision (i.e. the decision to diversify), this article corrects for the endogeneity of two
firm decisions (i.e. the decision to diversify and the decision to initiate payout).
Typically, in the treatment effects model, an initial univariate probit model generates the Inverse
Mills ratio to use in the second-stage regression model. In this study, with two endogenous choice
variables, two Inverse Mills ratios are generated from a bivariate probit model in which one equa-
tion estimates the firms decision to diversify and another equation estimates the firms decision to
initiate payout. Analogous to the seemingly unrelated regression with respect to ordinary least
squares (OLS), the bivariate probit model allows two separate probit models to be correlated in
their error terms. Since theory suggests that the same factors that make a single-business firm more
likely to become diversified also make it simultaneously more likely to initiate payout, bivariate
probit estimation can account for unobserved heterogeneity that influences both the decision to
diversify and the decision to initiate payout.
In any model correcting for self-selection, it is important to use two sets of controls or instru-
mental variables. The first set of controls is similar to that in the second-stage model predicting
firm value (i.e. excess valuethat is, firm size measured as the log of total assets), profitability
measured as ROS, investment measured as capital expenditures divided by sales, and research
intensity measured as the ratio of R&D expenditure to sales. The second set of controls, or instru-
ments, is correlated with the selection variables (i.e. diversifying and initiating payout) but not with
the second-stage dependent variable (i.e. excess value). These controls (described in the following
paragraphs) include firm-, industry-, and macroeconomic-level variables and are consistent with
the prior literature (e.g. Campa and Kedia, 2002).
At the firm level, a control is used to indicate whether the firm is traded on a major exchange
(New York Stock Exchange (NYSE), American Stock Exchange (AMEX), or National Association
of Securities Dealers Automated Quotations (NASDAQ)), and another control is used to indicate
whether the firm is listed as part of the Standard & Poors (S&P) industrial or transportation indi-
ces since these firms are more likely to diversify. Another control indicates whether the firm is an
international firm as these firms are likely listed on a US exchange prior to major financing, cor-
porate restructuring, or diversifying. Differences in the availability of free cash flow across firms
are accounted for by including both the current and lagged values of the ratio of cash and short-
term investments to assets. Time-invariant firm characteristics are captured by including controls
for the average values of firm size, profitability, and investment for the years that the firm is in the
sample.
Industry heterogeneity is controlled for by including measures of the percent of industry sales
that take place in diversified firms, as well as the percent of industry participants that pay a divi-
dend or buyback stock. The selection model also includes industry dummy variables at the two-
digit SIC level to account for time-invariant industry-level heterogeneity.
Macroeconomic trends are accounted for by the present and lagged values in the growth rate of
real gross domestic product (GDP). It is worth noting that for identification purposes, the macro-
economic variables and industry-level variables are especially important for ensuring that the
selection model is identified by more than just the nonlinearity of the Inverse Mills ratio. The rea-
son for this is because, by construction, the dependent variable, excess value, is divided by an
industry median for each year, so that these instruments are almost certain, by construction, to be
uncorrelated with the dependent variable. Descriptive statistics and a correlation table for the vari-
ables used in the main analysis as well as the selection equations are provided in Table 1.
Analysis
As noted previously, the analysis for this article relies on a two-stage treatment effects model in
which excess value (V
it
) is modeled as a function of control variables (X
it
), the decision to diversify
(D
it
), the decision to initiate payout (P
it
), and endogeneity correction terms as shown in the follow-
ing equation
V X D P
it it it it D D P P it
= + + + + + +
0 1 2 3 (1)
T
a
b
l
e

1
.

D
e
s
c
r
i
p
t
i
v
e

s
t
a
t
i
s
t
i
c
s

a
n
d

c
o
r
r
e
l
a
t
i
o
n
s
.
V
a
r
i
a
b
l
e
M
e
a
n
S
D
1
2
3
4
5
6
7
8
9
1
0
1
1
1
2
1
3
1
4
1
5
1
6
1
E
x
c
e
s
s

v
a
l
u
e
0
.
0
4
0
.
8
3
1

2
D
i
v
e
r
s
i
f
i
c
a
t
i
o
n

s
t
a
t
u
s
0
.
2
6
0
.
4
4
0
.
0
4
1

3
P
a
y
o
u
t

s
t
a
t
u
s
0
.
3
7
0
.
4
8
0
.
0
8
0
.
2
2
1

4
F
i
r
m

s
i
z
e

(
l
o
g

o
f

t
o
t
a
l

a
s
s
e
t
s
)
5
.
2
1
.
7
1
0
.
2
0
.
2
2
0
.
4
1
1

5
P
r
o
f
i
t
a
b
i
l
i
t
y

(
R
O
S
)
0
.
0
5
0
.
3
0
.
0
2
0
.
0
6
0
.
1
7
0
.
0
9
1

6
I
n
v
e
s
t
m
e
n
t

(
c
a
p
i
t
a
l

e
x
p
e
n
d
i
t
u
r
e
s
/
s
a
l
e
s
)
0
.
1
0
.
2
6
0
.
1
7
0
.
0
5
0
.
0
1
0
.
1
3
0
.
1
8
1

7
L
e
v
e
r
a
g
e

(
d
e
b
t
/
a
s
s
e
t
s
)
0
.
2
0
.
2
3
0
.
0
7
0
.
0
5
0
.
0
1
0
.
1
9
0
0
.
1
4
1

8
F
i
r
m

s
i
z
e

(
l
o
g

o
f

t
o
t
a
l

a
s
s
e
t
s

s
q
u
a
r
e
d
)
3
0
.
0
2
2
0
.
1
3
0
.
1
7
0
.
2
3
0
.
4
1
0
.
9
8
0
.
1
0
.
1
2
0
.
1
8
1

9
R
e
s
e
a
r
c
h

i
n
t
e
n
s
i
t
y

(
R
&
D
/
s
a
l
e
s
)
0
.
0
4
0
.
1
6
0
.
1
2
0
.
0
6
0
.
1
2
0
.
0
3
0
.
3
9
0
.
0
3
0
.
1
0
.
0
4
1

1
0
M
a
j
o
r

e
x
c
h
a
n
g
e
0
.
7
7
0
.
4
2
0
.
1
8
0
.
0
4
0
.
1
8
0
.
2
3
0
.
1
0
.
0
1
0
.
0
9
0
.
2
0
.
0
6
1

1
1
S
&
P

i
n
d
i
c
e
s
0
.
0
7
0
.
2
5
0
.
1
3
0
.
0
9
0
.
2
0
.
3
9
0
.
0
8
0
0
.
0
2
0
.
4
2
0
0
.
1
5
1

1
2
F
o
r
e
i
g
n

i
n
c
o
r
p
o
r
a
t
i
o
n
0
.
0
8
0
.
2
7
0
.
0
6
0
.
0
3
0
.
0
8
0
.
2
2
0
.
0
1
0
.
0
9
0
.
0
3
0
.
2
3
0
0
0
.
0
6
1

1
3
P
e
r
c
e
n
t

o
f

i
n
d
u
s
t
r
y

s
a
l
e
s

i
n

d
i
v
e
r
s
i
f
i
e
d

f
i
r
m
s
0
.
4
4
0
.
2
5
0
.
0
2
0
.
2
1
0
.
1
9
0
.
0
6
0
.
0
3
0
.
0
2
0
.
0
3
0
.
0
6
0
.
0
3
0
.
0
7
0
.
0
5
0
.
0
3
1

1
4
P
e
r
c
e
n
t

o
f

i
n
d
u
s
t
r
y

p
a
r
t
i
c
i
p
a
n
t
s

t
h
a
t

p
a
y
o
u
t
0
.
4
9
0
.
2
7
0
.
0
2
0
.
0
5
0
.
1
7
0
.
1
5
0
.
0
8
0
.
0
4
0
.
0
5
0
.
1
5
0
.
0
5
0
.
0
6
0
.
0
6
0
.
0
2
0
.
2
5
1

1
5
C
a
s
h

a
n
d

s
h
o
r
t
-
t
e
r
m

i
n
v
e
s
t
m
e
n
t
s
/
a
s
s
e
t
s
0
.
1
3
0
.
1
7
0
.
2
5
0
.
1
3
0
.
1
7
0
.
1
4
0
.
1
4
0
.
0
2
0
.
3
1
0
.
1
5
0
.
3
5
0
.
1
0
.
0
3
0
.
0
5
0
.
0
5
0
.
1
4
1

1
6
P
e
r
c
e
n
t

c
h
a
n
g
e

i
n

G
D
P
0
.
0
3
0
.
0
2
0
.
0
2
0
.
0
4
0
.
0
6
0
.
0
2
0
.
0
5
0
.
0
2
0
.
0
1
0
.
0
2
0
.
0
4
0
.
0
4
0
0
.
0
2
0
.
0
7
0
.
2
6
0
.
0
5
1
G
D
P
:

g
r
o
s
s

d
o
m
e
s
t
i
c

p
r
o
d
u
c
t
;

S
&
P
:

S
t
a
n
d
a
r
d

&

P
o
o
r
s
;

R
O
S
:

r
e
t
u
r
n

o
n

s
a
l
e
s
.
The treatment effects model hypothesizes that the decisions to diversify or initiate payout are
based on unobserved latent variables D
it
*
and P
it
*
that also affect firm value. In the selection equa-
tion, D
it
*
and P
it
*
are estimated via a bivariate probit model in which diversifying is one dependent
variable and the other dependent variable is the firms payout policy decision. Analogous to the
seemingly unrelated regressions model, bivariate probit allows estimation of two selection varia-
bles as a function of instrumental variables (Z
it
), with residuals that have the correlation , so that
the unobserved variables affecting a firms diversification choice are also allowed to affect a firms
payout choice
D Z D D
P Z v P
it D it it it it
it P it it it

= + = >
= + =

, ,
,
1 0 0 if otherwise
11 0 0
0
if otherwise P
E Z E v Z
Var Z V
it
it it it it
it it
>
= =
=
,
[ | ] [ | ]
[ | ]
aar v Z
Cov v Z
it it
it it it
[ | ]
[ , | ]
=
=
1

The bivariate probit model in equation (2) generates two self-selection corrections,
D
for the
diversification decision and
P
for the payout decision, to control for the two decisions a firm faces

D D it
D it
D it
D D it
D it
D it
Z
Z
Z
Z
Z
Z
1 2
1
( ) =
( )
( )
( ) =
( )
( )
PP p it
P it
P it
P P it
P it
P it
Z
Z
Z
Z
Z
Z
1 2
1
( )
=
( )
( )
( )
=
( )
( )
where (.) and (.) are the density and the cumulative distribution functions, respectively, of the
standard normal distribution. The correction terms (
D
) and (
P
) are then added to equation (1) as
additional regressors
V X D P
Z D Z D
it it it it D
D D it it D D it it
= + + + +
+

0 1 2 3
1 2
1 ( ) ( )( )
[[ ]
+ +
[ ]
+

( ) ( )( )
P P P it it P P it it it
Z P Z P
1 2
1
The results of the selection equations for both samples are given in Table 2.
Results
The returns to diversification are hypothesized to be higher for firms facing less attractive reinvest-
ment options in existing businesses (Hypothesis 1). Two samples of firms were used to test this
hypothesisone with higher opportunity costs of reinvestment (baseline sample) and the other
with lower opportunity costs of reinvestment (the sample restricted to firms experiencing slowing
growth). Results for these samples are shown in Table 3, columns 2 and 3, respectively. For the
baseline sample, there is a negative coefficient associated with diversification (0.234). This
(2)
(3)
(4)
T
a
b
l
e

2
.

B
i
v
a
r
i
a
t
e

p
r
o
b
i
t

s
e
l
e
c
t
i
o
n

f
o
r

b
a
s
e
l
i
n
e

a
n
d

r
e
s
t
r
i
c
t
e
d

s
a
m
p
l
e
s
.
B
a
s
e
l
i
n
e

s
a
m
p
l
e
R
e
s
t
r
i
c
t
e
d

s
a
m
p
l
e

D
i
v
e
r
s
i
f
i
e
d
P
a
y
o
u
t
D
i
v
e
r
s
i
f
i
e
d
P
a
y
o
u
t
F
i
r
m

s
i
z
e

(
l
o
g

o
f

t
o
t
a
l

a
s
s
e
t
s
)
0
.
3
9
7
*
*
*

(
1
1
.
4
1
)
0
.
0
8
9
*
*
*

(
2
.
6
7
)
0
.
4
6
8
*
*
*

(
6
.
7
4
)
0
.
1
0
8
*

(
1
.
7
0
)
P
r
o
f
i
t
a
b
i
l
i
t
y

(
R
O
S
)
0
.
2
5
5
*
*

(
2
.
0
4
)
1
.
3
4
5
*
*
*

(
6
.
0
9
)
0
.
9
8
3
*
*
*

(
2
.
7
5
)
1
.
5
3
0
*
*
*

(
3
.
7
7
)
I
n
v
e
s
t
m
e
n
t

(
c
a
p
i
t
a
l

e
x
p
e
n
d
i
t
u
r
e
s
/
s
a
l
e
s
)
0
.
8
3
0
*
*
*

(
4
.
6
3
)
0
.
0
8
2

(
0
.
6
3
)
2
.
2
1
2
*
*
*

(
4
.
3
0
)
0
.
5
5
9
*
*

(
2
.
4
1
)
R
e
s
e
a
r
c
h

i
n
t
e
n
s
i
t
y

(
R
&
D
/
s
a
l
e
s
)
0
.
0
8
6

(
1
.
3
3
)
3
.
3
6
0
*
*
*

(
7
.
4
1
)
0
.
0
7
3

(
0
.
1
3
)
2
.
8
3
0
*
*
*

(
3
.
7
8
)
M
a
j
o
r

e
x
c
h
a
n
g
e
0
.
0
0
7

(
0
.
1
7
)
0
.
0
9
8
*
*

(
2
.
1
7
)
0
.
0
2
9

(
0
.
3
4
)
0
.
0
9

(
1
.
0
5
)
S
&
P

i
n
d
i
c
e
s
0
.
3
5
2
*
*
*

(
2
.
7
6
)
0
.
0
0
9

(
0
.
1
)
0
.
3
3
6

(
1
.
6
0
)
0
.
0
4
5

(
0
.
3
1
)
F
o
r
e
i
g
n

i
n
c
o
r
p
o
r
a
t
i
o
n
0
.
0
5
1

(
0
.
6
6
)
0
.
1
9
9
*
*
*

(
2
.
9
7
)
0
.
2
3
0

(
1
.
3
1
)
0
.
1
3
9

(
1
.
0
4
)
P
e
r
c
e
n
t

o
f

i
n
d
u
s
t
r
y

s
a
l
e
s

i
n

d
i
v
e
r
s
i
f
i
e
d

f
i
r
m
s
1
.
0
8
6
*
*
*

(
8
.
2
5
)
1
.
5
8
6
*
*
*

(
5
.
9
2
)

P
e
r
c
e
n
t

o
f

i
n
d
u
s
t
r
y

p
a
r
t
i
c
i
p
a
n
t
s

t
h
a
t

p
a
y
o
u
t
0
.
0
4
5

(
0
.
4
2
)
0
.
2
3
4

(
1
.
0
0
)
C
a
s
h

a
n
d

s
h
o
r
t
-
t
e
r
m

i
n
v
e
s
t
m
e
n
t
s
/
a
s
s
e
t
s
0
.
8
1
5
*
*
*

(
4
.
1
6
)
0
.
2
0
5

(
1
.
0
6
)
1
.
2
4
8
*
*
*

(
2
.
8
3
)
0
.
0
6
7

(
0
.
1
7
)
C
a
s
h

a
n
d

s
h
o
r
t
-
t
e
r
m

i
n
v
e
s
t
m
e
n
t
s
/
a
s
s
e
t
s

(
l
a
g
g
e
d
)
0
.
6
4
0
*
*
*

(
3
.
5
9
)
0
.
4
0
1
*
*

(
2
.
1
7
)
0
.
5
0
8

(
1
.
1
8
)
1
.
1
2
6
*
*
*

(
2
.
9
6
)
P
e
r
c
e
n
t

c
h
a
n
g
e

i
n

G
D
P
1
8
.
7
5
9
*
*
*

(
9
.
3
6
)
0
.
5
9
1

(
0
.
3
9
)
2
0
.
5
8
9
*
*
*

(
5
.
2
0
)
3
.
6
4
5

(
1
.
3
5
)
P
e
r
c
e
n
t

c
h
a
n
g
e

i
n

G
D
P

(
l
a
g
g
e
d
)
1
0
.
8
5
6
*
*
*

(
7
.
4
2
)
0
.
2
9
3

(
0
.
2
2
)
2
9
.
5
2
3
*
*
*

(
6
.
6
0
)
1
.
2
3

(
0
.
4
7
)
A
v
e
r
a
g
e

f
i
r
m

s
i
z
e

(
l
o
g

o
f

t
o
t
a
l

a
s
s
e
t
s

s
q
u
a
r
e
d
)
0
.
3
6
4
*
*
*

(
9
.
2
6
)
0
.
1
4
2
*
*
*

(
3
.
8
9
)
0
.
4
4
3
*
*
*

(
5
.
5
4
)
0
.
1
8
9
*
*
*

(
2
.
7
0
)
A
v
e
r
a
g
e

p
r
o
f
i
t
a
b
i
l
i
t
y

(
a
v
e
r
a
g
e

R
O
S
)
0
.
1
1
9

(
0
.
8
1
)
0
.
4
7
3
*

(
1
.
8
9
)
0
.
2
7
9

(
0
.
6
0
)
0
.
7
7
8

(
1
.
5
2
)
A
v
e
r
a
g
e

i
n
v
e
s
t
m
e
n
t

(
a
v
e
r
a
g
e

c
a
p
i
t
a
l

e
x
p
e
n
d
i
t
u
r
e
s
/
s
a
l
e
s
)
0
.
1
5
2

(
0
.
9
4
)
0
.
2
8
4

(
1
.
6
1
)
0
.
5
7
0
*

(
1
.
7
3
)
0
.
5
5
4
*

(
1
.
6
5
)
C
o
n
s
t
a
n
t
2
.
9
7
9
*
*
*

(
7
.
6
6
)
1
.
9
6
7
*
*
*

(
4
.
7
8
)

0
.
0
4
9
(
0
.
0
0
9
)

S
t
a
n
d
a
r
d

e
r
r
o
r

o
f

a
(
0
.
0
4
6
)
(
0
.
1
1
)

N
2
3
,
8
5
5
7
9
1
6

G
D
P
:

g
r
o
s
s

d
o
m
e
s
t
i
c

p
r
o
d
u
c
t
;

S
&
P
:

S
t
a
n
d
a
r
d

&

P
o
o
r
s
;

R
O
S
:

r
e
t
u
r
n

o
n

s
a
l
e
s
.
t
-
s
t
a
t
i
s
t
i
c

v
a
l
u
e
s

a
r
e

g
i
v
e
n

i
n

p
a
r
e
n
t
h
e
s
e
s
.
a

i
s

t
h
e

c
o
r
r
e
l
a
t
i
o
n

b
e
t
w
e
e
n

t
h
e

r
e
s
i
d
u
a
l
s

o
f

t
h
e

t
w
o

e
q
u
a
t
i
o
n
s
.
*
p

<

0
.
1
,

*
*
p

<

0
.
0
5
,

*
*
*
p

<

0
.
0
1
.
means that relative to reinvestment, there is a 23.4% discount in excess value associated with
diversifying. Turning to the restricted sample in which firms face a lower opportunity cost of rein-
vestment (i.e. slowing growth), there is a positive coefficient associated with diversifying (0.402).
This means that relative to reinvestment, for these firms experiencing slowing growth (not slow
growth or no growth), there is a 40.2% premium in excess value associated with diversifying.
These results are consistent with Hypothesis 1that is, the returns to diversification increase when
reinvestment in existing businesses is less attractive.
The returns to payout are hypothesized to be higher for firms facing less attractive reinvestment
options in existing businesses (Hypothesis 2). Again, two samples of firms were used to test this
hypothesis: one with higher opportunity costs of reinvestment (baseline sample) and the other with
lower opportunity costs of reinvestment (the sample restricted to firms experiencing slowing
growth). Results for these samples are shown in Table 3, columns 2 and 3, respectively. For the
baseline sample, there is a statistically significant positive coefficient of 0.117 associated with
initiating payout. In the restricted sample, this coefficient reduces to a statistically insignificant
level of 0.003. Thus, Hypothesis 2 is not supported.
Hypothesis 3a predicts that diversification will be better than payout when reinvestment opportuni-
ties are declining; Hypothesis 3b predicts the opposite. Hypothesis 3a is supported over 3b; the coef-
ficient for diversification is much larger (0.402) than it is for payout (0.003) in the restricted sample.
Across both the baseline and restricted models in Table 3, three out of the four endogeneity cor-
rection terms are significant and negative, indicating that the factors that lead firms to choose to
diversify or payout also reduce the firms value.
Discussion and conclusion
There is a growing recognition of the importance of incorporating opportunity costs into strategic
management research (e.g. Levinthal and Wu, 2010). This article demonstrates the value of such
efforts in the literature comparing the effects of reinvestment versus diversification on firm
Table 3. Regressions predicting the effect of diversifying and initiating payout on excess value.
Baseline sample Restricted sample
Firm size (log of total assets) 0.178*** (7.24) 0.163** (2.24)
Profitability (ROS) 0.316*** (15.75) 0.153* (1.70)
Investment (capital expenditure/sales) 0.289*** (13.27) 0.002 (0.03)
Leverage (debt/assets) 0.102*** (6.00) 0.275*** (2.83)
Firm size (log of total assets squared) 0.006*** (2.68) 0.004 (0.55)
Research intensity (R&D/sales) 0.086*** (3.27) 0.109 (0.67)
Diversification status 0.234** (2.23) 0.402* (1.83)
Payout status 0.117*** (5.70) 0.003 (0.05)
D
0.071 (1.48) 0.206** (1.99)
P
0.018*** (4.34) 0.023*** (2.89)
Constant 1.051*** (15.28) 0.509*** (2.59)
R
2
0.052 0.01
N 23,804 7892
ROS: return on sales.
t-statistic values are given in parentheses.
*p < 0.1, **p < 0.05, ***p < 0.01.
performancean area of considerable debate (Palich et al., 2000; Prahalad and Bettis, 1986;
Rumelt, 1982). Indeed, there is still little consensus on this relationship, despite a vast quantity of
articles on this subject spanning at least half a century. Articles showing a positive relationship are
as common as those showing a negative relationship, and many show no relationship at all. Indeed,
powerful theoretical arguments can be made for all three of these results.
This article suggests that a failure to understand the opportunity costs associated with reinvest-
ment may partially explain this lack of consensus. The central argument of this article is that the
impact of reinvestment, corporate diversification, and payout policy on firm performance may in
part depend on the opportunity costs that the firm facesthat is, when the opportunity cost of
reinvestment is higher, the returns to diversification will be lower and when the opportunity cost of
reinvestment is lower, the returns to diversification will be higher.
The results offer support for this view. When firms are growing, the opportunity cost of diver-
sifying is higher, and the value of diversifying is negative; but for firms experiencing slowing
growth, diversification can be a value-enhancing strategy. These results suggest that returns to
reinvestment and diversification depend critically on the relative value that each of these alterna-
tives create and not just on the value of reinvestment separately and the value of diversification
separately.
This research also included payout as an opportunity forgone relative to reinvestment (and
diversification). Payoutthrough stock repurchases or dividend policyis not an action routinely
considered in the strategic management literature. After all, payout is not likely to be a source of
competitive advantage for a firm. However, payout was important to include in this research
because it represents a well-established alternative to both reinvestment and diversification. Failure
to include payout in the research design would be to ignore one of the most important opportunities
forgone in this particular strategic context.
This said, the results regarding payout are quite interesting and not entirely consistent with
research in finance that shows a consistently positive relationship between payout and firm value.
For firms with slowing growth in particular, relative to reinvestment and diversification, payout
does not have a significant positive relationship with firm value. This suggests that the large litera-
ture in finance that examines the relationship between payout and firm value suffers from the same
limitation as the literature in strategic management on reinvestment and diversification. That is, the
payout literature may fail to control for both of the opportunities forgonenamely, reinvestment
and diversification. The research reported here suggests that when the values of these alternatives
to payout are considered, reinvestment or diversification look relatively better.
The importance of controlling for a firms other alternatives in the study of the strategyperfor-
mance relationship generalizes beyond the present area of study. The traditional research approach
in strategic management does not account for how the impact of strategies on a firms performance
depends not only on the value such strategies create but also on the value that different strategies
could have created for a firm if those strategies had been chosen. It is quite possible that accounting
for these roads not takenboth theoretically and empiricallywill increase our understanding of
the impact of a firms strategic choices on that firms performance.
At least one other example is found in the corporate social responsibility literature. Within this
literature, hundreds of empirical studies have been published following the typical empirical
approach for strategy research described in this article. That is, most articles in this literature apply
some measure of the extent to which a firm is implementing a strategy of socially responsible
activities and some measure of firm performance and thencontrolling for environmental and
organizational contingencies identified by relevant theoryexamine the empirical relationship
between socially responsible activities and firm performance. As Margolis and Walsh (2001) note,
there seems to be a slight positive relationship between corporate social responsibility and firm
performance. However, this work has yet to consider the opportunity cost of these firms socially
responsible investments. There are clearly alternatives available to firms that might return to the
firm far greater financial rewards than investments in corporate social performance. This then sug-
gests inquiry into what those alternatives might be and why it is that firms choose to engage in
corporate social performance when other more lucrative alternatives could be pursued.
These are fundamental questions about the opportunity costs associated with pursuing a particu-
lar strategy, that is, the value of the opportunities forgone when a firm pursues a particular strategy,
and how this value forgone is critical to consider when choosing a particular strategy.
At a more fundamental level, all this researchon reinvestment, diversification, and payout
separately and on reinvestment, diversification, and payout that sees each as opportunities forgone
for each otherseek to examine the average relationship between a particular firm actionrein-
vestment, diversification, and/or payoutand firm value. However, most of the theory that explains
when firms will generate value from their strategic efforts suggests that it is how firms use their
individual resources and capabilities to conceive and implement their individual strategies that
determine the extent of the competitive advantage that will be generated (Barney, 1991). A firm
with certain kinds of resources and capabilities may be able to generate more value through rein-
vesting than through diversification or payout, a firm with different resources and capabilities may
be able to generate more value through diversification than reinvesting or payout, and so forth. The
fact that, on average, slow growth firms create more value through diversification than reinvest-
ment says nothing about a particular firm in a slow growth setting that, say, might happen to have
the resources and capabilities that lead to more value being created by reinvestment or payout.
In the end, engaging in research that examines the relationship between strategy and perfor-
mance for individual firms may be a valuable opportunity forgone of research that examines the
determinants of the average relationship between a strategy and the performance of a sample of
firms.
Notes
1. Firms meeting any of the following criteria were removed: any business segments in financial indus-
tries, years where total firm sales are less than US$20 million, firm years where the sum of segment
sales differs from total firm sales by more than 1%, and years where the data do not provide four-digit
SIC industry coding for all of its reported segments (e.g. Berger and Ofek, 1995; Campa and Kedia,
2002).
2. A total of 79% were matched at the four-digit SIC level, 13% at the three-digit level, and 8% at the two-
digit level.
3. Considering Halls (1990) observation that when R&D is not reported, it usually means that the R&D to
sales ratio is very low (p. 106), R&D is set equal to zero for firms that do not report R&D data, instead of
removing these firms from the sample.
References
Allen, F. and Michaely, R. (2005) Payout Policy, in G. Constantinides, M. Harris and R. Stulz (eds) North-
Holland Handbook of Economics, pp. 337429. Amsterdam: Elsevier.
Barney, J. (1991) Firm Resources and Sustained Competitive Advantage, Journal of Management 17(1):
99120.
Barney, J. B. (1988) Returns to Bidding Firms in Mergers and Acquisitions: Reconsidering the Relatedness
Hypothesis, Strategic Management Journal 9: 718.
Berger, P. and Ofek, E. (1995) Diversifications Effect on Firm Value, Journal of Financial Economics
37: 3965.
Bettis, R. A. (1981) Performance Differences in Related and Unrelated Diversified Firms, Strategic Man-
agement Journal 2: 37993.
Campa, J. M. and Kedia, S. (2002) Explaining the Diversification Discount, Journal of Finance 57:
173162.
Comment, R. and Jarrell, G. (1995) Corporate Focus and Stock Returns, Journal of Financial Economics
37: 6787.
Denis, D. J., Denis, D. K. and Sarin, A. (1997) Agency Problems, Equity Ownership, and Corporate Diver-
sification, Journal of Finance 52: 13560.
Easterbrook, F. H. (1984) Two Agency-Cost Explanations of Dividends, American Economic Review 74:
6509.
Gomes, J. and Livdan, D. (2004) Optimal Diversification: Reconciling Theory and Evidence, Journal of
Finance 59: 50735.
Goold, M. and Campbell, A. (1998) Desperately Seeking Synergy. Harvard Business Review (September
October): 13143.
Grant, R. M. (1988) On Dominant Logic, Relatedness and the Link between Diversity and Performance,
Strategic Management Journal 9: 63942.
Grullon, G., Michaely, R. and Swaminathan, B. (2002) Are Dividend Changes a Sign of Firm Maturity?
Journal of Business 75: 387425.
Hall, B. H. (1990) The Impact of Corporate Restructuring on Industrial Research and Development, in M.
N. Baily and C. L. Schultze (eds) Brookings Papers on Economic Activity: Microeconomics 1990, pp.
85136. Washington, DC: Brookings Institution Press.
Hamilton, B. H. and Nickerson, J. A. (2003) Correcting for Endogeneity in Strategic Management Research,
Strategic Organization 1: 5178.
Heckman, J. (1979) Sample Selection Bias as Specification Error, Econometrica 46: 15361.
Hill, C. W. L., Hitt, M. A. and Hoskission, R. E. (1992) Cooperative versus Competitive Structures in
Related and Unrelated Diversified Firms, Organization Science 3: 50120.
Hoskisson, R. E. (1987) Multidivisional Structure and Performance: The Contingency of Diversification
Strategy, Academy of Management Journal 30: 62544.
Hoskisson, R. E. and Turk, T. A. (1990) Corporate Restructuring: Governance and Control Limits of the
Internal Capital Market, Academy of Management Review 15: 45977.
Hoskisson, R. E., Hitt, M. A., Johnson, R. A. and Moesel, D. S. (1993) Construct Validity of an Objective
(Entropy) Categorical Measure of Diversification Strategy, Strategic Management Journal 14: 215335.
Ikenberry, D., Lakonishok, J. and Vermaelen, T. (1995) Market Underreaction to Open Market Share Repur-
chases, Journal of Financial Economics 39: 181208.
Jensen, M. C. (1986) Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers, American Eco-
nomic Review 76: 3239.
Jones, G. R. and Hill, C. W. L. (1988) Transaction Cost Analysis of Strategy-Structure Choice, Strategic
Management Journal 9: 15972.
Lang, L. H. P. and Stulz, R. M. (1994) Tobins q, Corporate Diversification, and Firm Performance, Jour-
nal of Political Economy 102: 124880.
LeBaron, D. and Speidell, L. S. (1987) Why Are the Parts Worth More than the Sum? Chop Shop, A
Corporate Valuation Model, in Conference Series Proceedings. Boston, MA: Federal Reserve Bank of
Boston, pp. 78101.
Levinthal, D. A. and Wu, B. (2010) Opportunity Costs and Non-Scale Free Capabilities: Profit Maximiza-
tion, Corporate Scope, and Profit Margins, Strategic Management Journal 31: 780801.
Maksimovic, V. and Phillips, G. (2002) Do Conglomerate Firms Allocate Resources Inefficiently across
Industries? Journal of Finance 57: 72167.
Margolis, J. D. and Walsh, J. P. (2001) People and Profits?: The Search for A Link Between A Companys
Social and Financial Performance, Lawrence Erlbaum Associates, Inc.
Markides, C. C. and Williamson, P. J. (1994) Related Diversification, Core Competencies, and Corporate
Performance, Strategic Management Journal 15(Summer Special Issue): 14965.
Miller, D. J. (2004) Firms Technological Resources and the Performance Effects of Diversification: A Lon-
gitudinal Study, Strategic Management Journal 25: 1097119.
Miller, D. J. (2006) Technological Diversity, Related Diversification, and Firm Performance, Strategic
Management Journal 27: 60119.
Montgomery, C. A. and Wernerfelt, B. (1988) Diversification, Ricardian Rents, and Tobins q, RAND
Journal of Economics 19: 62332.
Nayyar, P. R. (1992) On the Measurement of Corporate Diversification Strategy: Evidence from Large U.S.
Service Firms, Strategic Management Journal 13: 21935.
Palich, L. E., Cardinal, L. B. and Miller, C. C. (2000) Curvilinearity in the Diversification-Performance Link-
age: An Examination of Over Three Decades of Research, Strategic Management Journal 21: 15574.
Prahalad, C. K. and Bettis, R. A. (1986) The Dominant Logic: A New Linkage between Diversity and Per-
formance, Strategic Management Journal 7: 485501.
Rajan, R., Servaes, H. and Zingales, L. (2000) The Cost of Diversity: The Diversification Discount and Inef-
ficient Investment, Journal of Finance 55: 3580.
Rumelt, R. P. (1982) Diversification Strategy and Profitability, Strategic Management Journal 3:
35969.
Scharfstein, D. S. and Stein, J. C. (2000) The Dark Side of Internal Capital Markets: Divisional Rent-Seek-
ing and Inefficient Investment, Journal of Finance 50: 253764.
Shin, H. H. and Stulz, R. M. (1998) Are Internal Capital Markets Inefficient? Quarterly Journal of Econom-
ics 113: 53152.
Stein, J. C. (1997) Internal Capital Markets and the Competition for Corporate Resources, Journal of
Finance 52: 11133.
Stimpert, J. L. and Duhaime, I. M. (1997) In the Eyes of the Beholder: Conceptualizations of Relatedness
Held by the Managers of Large Diversified Firms, Strategic Management Journal 18: 11125.
Stulz, R. M. (1990) Managerial Discretion and Optimal Financing Policies, Journal of Financial Econom-
ics 26: 327.
Teece, D. J. (1980) Economy of Scope and the Scope of the Enterprise, Journal of Economic Behavior &
Organization 1: 22345.
Teece, D. J. (1982) Toward an Economic Theory of the Multiproduct firm, Journal of Economic Behavior
& Organization 3: 3963.
Villalonga, B. (2004) Does Diversification Cause the Diversification Discount? Financial Management
33: 523.
Zuckerman, E. W. (2000) Focusing the Corporate Product: Securities Analysts and De-Diversification,
Administrative Science Quarterly 45(3): 591621.
Author biographies
Tyson B Mackey is an assistant professor of management at the Orfalea College of Business at the California
Polytechnic State University at San Luis Obispo. His research interests include the application of Bayesian
methods to strategic management research questions and returns to corporate social responsibility. He has
published papers in the Academy of Management Review, Academy of Management Proceedings, and serves
on the editorial boards of the Journal of Management and the Strategic Management Journal.
Jay B Barney, Presidential Professor of Strategic Management, holds the Pierre Lassonde Chair in Social
Entrepreneurship at the David Eccles School of Business at The University of Utah. He holds honorary visit-
ing appointments at Peking University (Beijing), Sun Yat Sen University (Guangzhou), Waikato University
(New Zealand), and Brunel University (UK) and has received honorary doctorate degrees (Lund University,
Sweden; Copenhagen Business School, Denmark; and the Universidad Pontificia Comillas, Madrid, Spain).
He served on the Executive Committee of the Business Policy and Strategy Division of the Academy, and as
President of the Division, was elected a fellow of the Academy of Management and a Fellow of the Strategic
Management Society, and received the Irwin Outstanding Educator Award for the Business Policy and
Strategy Division of AOM. Professor Barney has served on various editorial boards, as Associate Editor at
the Journal of Management, Senior Editor at Organization Science, and currently as Senior Editor at the
Strategic Entrepreneurship Journal. He has published over 100 articles and book chapters and six books. His
research focuses on identifying the attributes of firm resources and capabilities that enable firms to gain and
sustain a competitive advantage. In addition, he has begun doing research on entrepreneurship and corporate
social responsibility, with special emphasis on entrepreneurship among the abject poor. He has an active
consulting practice.

Strategic Management

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Strategic Management

Uploaded by

Copyright:

Available Formats

http://soq.sagepub.

http://soq.sagepub.com/cgi/alerts Email Alerts:

- May 8, 2013 OnlineFirst Version of Record

- Nov 7, 2013 Version of Record >>

You might also like