The interactions of corporate sales growth and diversification strategy: Cross-country evidence

This paper highlights the interactions of sales growth with diversification strategies and their joint effects on firm value. Employing firm-level data for 39 countries, we confirm a diversification discount on average for our sample firms, consistent with the evidence in the literature. After considering joint changes in industry-adjusted sales growth and diversification, however, we uncover a significant diversification premium when a decrease in diversification is accompanied with declining sales growth. We also find a lessened diversification discount when an increase in diversification is intertwined with increasing sales growth. In contrast, an increase in diversification in the face of decreasing sales growth leads to a significant diversification discount. We further show that the joint effects on firm value are more pronounced for developed market firms than for emerging market firms. Overall, our results suggest that despite the negative diversification effect on average, a lessened diversification discount and a diversification premium are viable if a firm's diversification strategy is properly developed in consideration of its business situations such as sales growth.