Title: Causality between corporate diversification and profitability: evidence from Japan

Authors: Kosei Fukuda

Addresses: Faculty of Commerce, Chuo University, 742-1 Higashinakano, Hachioji, Tokyo 192-0393, Japan

Abstract: Prior empirical studies on the relationship between corporate diversification and firm performance have not considered data stationarity and have devoted little consideration to the dynamics of this relationship, the endogeneity problem, and causality factors. To overcome these econometric problems simultaneously, a panel vector autoregressive model is applied to product diversification data on Japanese firms. The empirical results suggest the followings. First, the panel unit-root test recommends the use of diversification, and not diversity. Second, product diversification measured by the Herfindahl index has no relationship with the other three firm performance variables, while product diversification measured by the entropy index marginally increases sales growth, leading to an increase in profitability. The empirical implications for business researchers are also provided.

Keywords: relationship dynamics; corporate diversification; firm performance; Granger causality; panel VAR; vector autoregressive models; product diversification; endogeneity; profitability; Japan; sales growth.

DOI: 10.1504/IJAMS.2014.067188

International Journal of Applied Management Science, 2014 Vol.6 No.4, pp.304 - 322

Received: 22 Jul 2014
Accepted: 09 Oct 2014
Published online: 07 Feb 2015 *

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