Effect of diversification on firm performance: Application of the entropy measure

This study investigated the effects of diversification on firm performance in the restaurant industry. In prior studies, the theoretical rationales and empirical results appeared to contradict each other. These contradictory results may be due to factors such as industry-specific characteristics or a linear understanding of the relationship between diversification strategies and firm performance. Thus, this study suggested a non-linear hypothesis based on the costs and benefits of diversification strategies with businesses categorized based on their level of diversification. The results of this study showed that restaurant firms do not benefit from a low level of related diversification. This study also found that when restaurant firms are involved in both related and unrelated businesses, the optimal mixed ratio of diversification is approximately half and half. More detailed results, as well as academic and practical implications, are discussed in this paper.

► This study investigated the effects of related and unrelated diversification on firm performance in the restaurant industry.
► This study suggested the non-linear relationships between diversification and firm performance because of the costs and benefits at the different levels of diversification. This study also considered the endogenous relationship between diversification and firm performance.
► The results showed that restaurant firms do not benefit from a low level of related diversification. When restaurant firms are involved in both related and unrelated businesses, the optimal mixed ratio of diversification is approximately half and half.