No abstract

According to prevailing theory, firms diversify in response to excess capacity of factors that are subject to market failure. By probing into the heterogeneity of these factors, we develop the corollary that firms that elect to diversify most widely should expect the lowest average rents. An empirical test, with Tobin 's q as the measure of rents, is consistent with this theory. * Northwestern University. We are grateful to Robert Sartain for research assistance and to Stephen Ross and the Institute for the Study of Business Markets for supplying part of the data used in this study. We benefited from commentary by two anonymous referees and Marvin Lieberman on an earlier draft. ' If the process is anticipated, provisions for allocating the switching costs will be contracted for ex ante. See Klein, Crawford, and Alchian (1978).

This paper documents the significant presence of diversified firms in the U.S. economy and presents three views on why firms diversify. The market power view argues that firms diversify to wield conglomerate power across markets. The agency view argues that diversification is undertaken by managers pursuing their own interests at the expense of the firm's owners. The resource view argues that firms diversify in response to excess capacity in productive factors. A review of recent empirical research finds little support for the market-power view and a substantial amount of evidence that is consistent with the agency and resource views.

This research investigates the conceptual argument that acquisitions which are related in productlmarket or technological terms create higher value than unrelated acquisitions. Related acquisitions are found to have greater total dollar gains than unrelated acquisitions. Acquired firms in related acquisitions have substantially higher gains than acquired firms in unrelated acquisitions. These findings indicate that related target firms benefit more from acquisition than unrelated target firms. Implications of these findings for managers are discussed.

SUM MARYThis paper incorporates both diversification strategy and market structure variables in a study of corporate economic performance. A subsample of 128 firms from Rumelt's 1974 study was updated and utilized to investigate the possibility that market structure variables might moderate or confound the diversification/performance relationship he reported. Study results indicate that performance differences could be demonstrated for some of Rumelt's categories, but, across the range of categories, a hypothesis of performance differences was rejected. As expected, categories associated with distinctly high or distinctly low economic performance were also associated with significant differences in a series of market structure variables.Researchers from several disciplines have sought to identify factors which influence corporate economic performance. Strategic management researchers have sought to relate corporate economic performance to the major direction-setting decisions made by the firm. For a new and growing firm, these decisions frequently relate to the degree and manner in which its product line and served market should be extended. For an older firm which wishes to continue to grow, the key decisions generally relate to the degree and manner in which it should diversify into different businesses (Chandler, 1962;Scott, 1971).Starting from a very different perspective, researchers in industrial organization economics have been guided by a conceptual framework which examines possible relationships among (1) the structure of the industry (or industries) in which the firm operates, (2) the conduct of the firms within that industry, and (3) the level of economic performance both of the individual firms and of their Associated industries. This effort has yielded an extensive literature, much of which supports the proposition that firm profits are strongly influenced by the structure of the market or markets in which the firm operates (Scherer, 1970).These two streams of research have developed in large measure independently of each other. It is the purpose of the present research to incorporate both diversification strategy and market structure variables in a study of corporate economic performance.