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Returns to corporate diversification in the 1970s
Author(s) -
Ciscel David H.,
Evans Richard D.
Publication year - 1984
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.4090050203
Subject(s) - diversification (marketing strategy) , diseconomies of scale , profitability index , stochastic dominance , business cycle , business , recession , industrial organization , monetary economics , financial economics , economics , econometrics , finance , marketing , economies of scale , keynesian economics
Abstract This research analyzes the performance of large corporations during the business cycles of the 1970s. The analysis identifies the level of diversification preferred by a risk‐averse investor at different stages of the business cycle. The data base is a group of 222 large industrial corporations for which the number of four‐digit SIC production areas has been determined for each firm. The analytical method used is that of second‐degree stochastic dominance, a method that is sensitive not only to mean differences in corporate performance but also to the skewness of profitability distributions. The findings indicate that risk‐averters would prefer the ten‐year performance of moderately diversified firms to the performance of firms with low levels of diversification. In addition, moderately diversified firms were preferred to highly diversified firms. Finally, the experience of the 1970s suggest that there are serious managerial diseconomies of diversification in recessions.