The Relationship Between Firm Diversification and Firm Performance: Empirical Evidence from Indonesia

Heru Cahyo, Hadri Kusuma*, D. Agus Harjito, Zaenal Arifin

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

This extended study aims to analyze empirically the influence of firm diversification on firm performance moderated by the stages of the firm life cycle, which consists of introduction, growth, maturity, and decline. The target population of this study is the firms listed on the Indonesian Stock Exchange. The sampling method uses purposive sampling in the multi-business firm in Indonesia; it includes as many as 127 firms over the period from 2011 to 2017, totaling 889 firm-year observations. The firm performance is measured using a return of equity while the level of firm diversification with the minimum number of two operating segments is proxied by the Herfindahl index. The analysis method used in this study is the estimator model of the Generalized Method of Moment (GMM). The main findings show that the firm life cycle at the stage of growth and maturity significantly strengthens the influence of firm diversification on firm performance. On the other hand, the stage of decline fails to moderate the relationship between firm diversification and firm performance. This study discusses the implications and contributions of the findings theoretically, and provide some policy justifications for potential investors before they invest their money in the capital market.

Original languageEnglish
Pages (from-to)497-504
Number of pages8
JournalJournal of Asian Finance, Economics and Business
Volume8
Issue number3
DOIs
Publication statusPublished - 2021
Externally publishedYes

Keywords

  • Diversification
  • Firm Performance
  • Indonesia
  • Life Cycle

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