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Research summary: Prior theory suggests that the performance effects of a firm's diversification strategy depend on a firm's individual resources and capabilities and the setting within which it is operating. However, prior tests of this theory have examined the average diversification‐performance relationship across all firms, instead of estimating the diversification‐performance relationship at the individual firm level. Efforts to estimate this average relationship are inconsistent with a central assumption of much of strategic management theory—that firms maximize value by choosing strategies that exploit their heterogeneous resources and individual situation. By adopting an approach that allows an evaluation of the diversification‐performance relationship for individual firms, this article shows that firms, both focused and diversified, tend to choose that diversification strategy—focus, related diversification, or unrelated diversification—that maximizes value. Managerial summary: Instead of a universal diversification discount or premium, this article shows that the effect of diversification on performance is heterogeneously distributed across firms and that firms tend to be rational in their diversification decisions. Copyright © 2015 John Wiley & Sons, Ltd.

This article explores the theoretical and empirical implications of incorporating forgone opportunities in strategic management research. Drawing on the well-studied literature examining whether firms should reinvest in focused businesses or pursue alternatives of diversifying and/or paying out excess cash to shareholders, hypotheses are developed for when diversification and payout policy, as the opportunity costs of reinvesting in the firm's original businesses, will present firms with higher and lower opportunity costs. Empirical results suggest that the value of reinvestment in existing businesses is higher for firms facing lower opportunity costs of forgoing other alternatives (e.g. diversification and paying out) than for firms that have much higher opportunity costs of forgoing these same alternatives. Implications for incorporating opportunity costs into the diversification literature and the broader strategic management literature are also explored.Much strategy research focuses on the impact of a firm's strategic choices on its performance. The typical empirical structure of this work is straightforward: Scholars apply some measure of the extent to which a firm is implementing a particular strategy, some measure of firm performance, and then-controlling for environmental and organizational contingencies identified by relevant theory-examine the empirical relationship between a strategy and performance.

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