Product Diversification In Competitive R&D-Intensive Firms: An Empirical Study Of The Computer Software Industry

This paper studies the effect of diversification into different product categories within competitive high-tech industries. Empirical results obtained using the prepackaged computer software industry as the sample show that: (1) diversified firms appear to be more profitable (have higher returns on equity), attain a larger market share, enjoy higher excess market returns, and have a higher market-to-book ratio; (2) from the investors’ perspective, diversification per se does not increase firm value. Realized higher values do not appear to come from more efficient use of assets. Rather, they stem from the higher innovation efficiency (higher sales revenue per employee) and higher levels of R&D spending for firms that have diversified into different product categories than for firms that confine development to a single product category.

[1]  Z. Matolcsy,et al.  The Association between Technological Conditions and the Market Value of Equity , 2008 .

[2]  C. F. Phillips.  Industrial Market Structure and Economic Performance , 1971 .

[3]  Gordon M. Bodnar,et al.  Both Sides of Corporate Diversification: The Value Impacts of Geographic and Industrial Diversification , 1997 .

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

[5]  William L. Fuerst,et al.  Information Technology and Sustained Competitive Advantage: A Reourse-Based Analysis , 1995, MIS Q..

[6]  B. Lev,et al.  The Value-Relevance of Intangibles: The Case of Software Capitalization , 1998 .

[7]  Paul Zarowin,et al.  THE ROLE OF EARNINGS LEVELS IN ANNUAL EARNINGS-RETURNS STUDIES , 1992 .

[8]  Michael A. Hitt,et al.  Managerial Incentives and Investment in R&D in Large Multiproduct Firms , 1993 .

[9]  Stephen E. Margolis,et al.  Causes and Consequences of Market Leadership in Application Software , 1999 .

[10]  Andrew D. Henderson,et al.  Within‐business diversification in technology‐intensive industries , 2004 .

[11]  E. Ofek,et al.  Diversification's effect on firm value , 1995 .

[12]  J MataFrancisco,et al.  Information technology and sustained competitive advantage , 1995 .

[13]  D. Teece.  ECONOMIES OF SCOPE AND THE SCOPE OF THE ENTERPRISE , 1980 .

[14]  Hao Shen,et al.  Diversification and firm performance in China , 2011 .

[15]  T. Copeland,et al.  Financial Theory and Corporate Policy. , 1980 .

[16]  Peter Easton,et al.  EARNINGS AS AN EXPLANATORY VARIABLE FOR RETURNS , 1991 .

[17]  David F. Larcker,et al.  Business unit innovation and the structure of executive compensation , 1995 .

[18]  Carla K. Hayn.  The information content of losses , 1995 .