Corporate diversification, firm productivity and resource allocation decisions: The data envelopment analysis approach

Abstract Corporate diversification has been an important research topic in the field of business administration. Although it is regarded as an essential strategy for firms, its relationship with firm performance seems inconclusive in the literature. To fill this gap, our study uses data envelopment analysis (DEA) to develop models that help diversified firms more accurately calculate productivity at both the firm and its business segment levels, and then reallocate resources among business segments in order to achieve better firm overall performance. We empirically test the models using a sample of U.S. public firms for a period of 2012–2016. The results show that in comparison with two conventional DEA models, our model provides more useful productivity expression for diversified firms, and that the model-suggested resource reallocation is linked to better firm performance.

[1]  J. R. Moore,et al.  The theory of the growth of the firm twenty-five years after , 1960 .

[2]  E. Bradley,et al.  A theory of growth , 1976 .

[3]  D. Aigner,et al.  P. Schmidt, 1977,?Formulation and estimation of stochastic frontier production function models,? , 1977 .

[4]  Abraham Charnes,et al.  Measuring the efficiency of decision making units , 1978 .

[5]  A. Charnes,et al.  Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis , 1984 .

[6]  Rolf Färe,et al.  Efficiency measures for multiplant firms , 1984 .

[7]  B. Wernerfelt,et al.  A Resource-Based View of the Firm , 1984 .

[8]  K. Palepu.  Diversification strategy, profit performance and the entropy measure , 1985 .

[9]  M. Porter,et al.  How Information Gives You Competitive Advantage , 1985 .

[10]  Emmanuel Thanassoulis,et al.  Applied data envelopment analysis , 1991 .

[11]  F. Lichtenberg.  Corporate Takeovers and Productivity , 1992 .

[12]  Constantinos C. Markides,et al.  Consequences Of Corporate Refocusing: Ex Ante Evidence , 1992 .

[13]  George Kozmetsky,et al.  DEA of financial statements data: The U.S. computer industry , 1994 .

[14]  Sten Thore,et al.  Economies of scale in the US computer industry: An empirical investigation using data envelopment analysis , 1996 .

[15]  L. Seiford,et al.  Profitability and Marketability of the Top 55 U.S. Commercial Banks , 1999 .

[16]  Wade D. Cook,et al.  Characterizing an equitable allocation of shared costs: A DEA approach , 1999, Eur. J. Oper. Res..

[17]  J. Graham,et al.  Does Corporate Diversification Destroy Value? , 2001 .

[18]  Belén Villalonga.  Does Diversification Cause the 'Diversification Discount'? , 2000 .

[19]  David J. Denis,et al.  Global Diversification, Industrial Diversification, and Firm Value , 2001 .

[20]  Laura B. Cardinal,et al.  Curvilinearity in the diversification–performance linkage: an examination of over three decades of research , 2000 .

[21]  Stijn Claessens,et al.  When Does Corporate Diversification Matter to Productivity and Performance? Evidence from East Asia , 2003 .

[22]  Melissa A. Schilling,et al.  Disentangling the Theories of Firm Boundaries: A Path Model and Empirical Test , 2002, Organ. Sci..

[23]  Antoinette Schoar,et al.  Effects of Corporate Diversification on Productivity , 2002 .

[24]  Akin Sayrak,et al.  Corporate diversification and shareholder value: a survey of recent literature , 2003 .

[25]  John E. Beasley,et al.  Allocating fixed costs and resources via data envelopment analysis , 2003, Eur. J. Oper. Res..

[26]  Pekka J. Korhonen,et al.  Resource Allocation Based on Efficiency Analysis , 2004, Manag. Sci..

[27]  Agha Iqbal Ali,et al.  DEA Malmquist productivity measure: New insights with an application to computer industry , 2004, Eur. J. Oper. Res..

[28]  Andy Naranjo,et al.  Cross-country evidence on the value of corporate industrial and international diversification , 2004 .

[29]  Royston Greenwood,et al.  The effect of within-industry diversification on firm performance: synergy creation, multi-market contact and market structuration , 2004 .

[30]  Joe Zhu,et al.  Allocation of shared costs among decision making units: a DEA approach , 2005, Comput. Oper. Res..

[31]  Douglas J. Miller.  Technological diversity, related diversification, and firm performance , 2006 .

[32]  Judith Timmer,et al.  Cooperation and profit allocation in distribution chains , 2007, Decis. Support Syst..

[33]  Juan Santaló,et al.  Competition from Specialized Firms and the Diversification-Performance Linkage , 2008 .

[34]  Lei Fang,et al.  Resource allocation based on the DEA model , 2008, J. Oper. Res. Soc..

[35]  Chiang Kao,et al.  Efficiency decomposition in two-stage data envelopment analysis: An application to non-life insurance companies in Taiwan , 2008, Eur. J. Oper. Res..

[36]  Chiang Kao,et al.  Efficiency measurement for parallel production systems , 2009, Eur. J. Oper. Res..

[37]  Joe Zhu,et al.  Nonlinear inputs and diminishing marginal value in DEA , 2009, J. Oper. Res. Soc..

[38]  Todd Mitton.  Inefficient Labor of Inefficient Capital? Corporate Diversification and Productivity Around the World , 2009 .

[39]  Yue Maggie Zhou.  Synergy, Coordination Costs and Diversification Choices , 2010 .

[40]  Yan Luo,et al.  Resource allocation and target setting for parallel production system based on DEA , 2011 .

[41]  Robert E. Hoskisson,et al.  Resource-Based Theory and Corporate Diversification , 2011 .

[42]  Z. Tong.  Firm Diversification and the Value of Corporate Cash Holdings , 2008 .

[43]  Christopher L. Shook,et al.  Antecedents and Consequences of Franchising: Past Accomplishments and Future Challenges , 2011 .

[44]  Ming-Miin Yu,et al.  Human resource rightsizing using centralized data envelopment analysis: Evidence from Taiwan's Airports , 2013 .

[45]  Rebecca N. Hann,et al.  Corporate Diversification and the Cost of Capital: Corporate Diversification and the Cost of Capital , 2013 .

[46]  Paul Rouse,et al.  Data Envelopment Analysis with Nonhomogeneous DMUs , 2013, Oper. Res..

[47]  Joe Zhu,et al.  Fixed cost and resource allocation based on DEA cross-efficiency , 2014, Eur. J. Oper. Res..

[48]  Yao Chen,et al.  DEA for non-homogenous parallel networks , 2015 .

[49]  Venkat Kuppuswamy,et al.  Does Diversification Create Value in the Presence of External Financing Constraints? Evidence from the 2007–2009 Financial Crisis , 2010, Manag. Sci..

[50]  Joe Zhu,et al.  DEA models for non-homogeneous DMUs with different input configurations , 2016, Eur. J. Oper. Res..

[51]  Abbas Seifi,et al.  A bi-level formulation for DEA-based centralized resource allocation under efficiency constraints , 2016, Comput. Ind. Eng..

[52]  Jian-xing Ren,et al.  Profit allocation analysis among the distributed energy network participants based on Game-theory , 2017 .

[53]  Witold Pedrycz,et al.  Data envelopment analysis for bi-level systems with multiple followers , 2017 .

[54]  Tao Ding,et al.  Resource sharing and payoff allocation in a three-stage system: Integrating network DEA with the Shapley value method , 2019, Omega.