UNIVERSITITEKNOLOGI MARA
RELATED AND UNRELATED
DIVERSIFICATION STRATEGY ON
PERFORMANCE
WAN MOHD NAZRI BIN WAN DAUD
Thesis submitted in fulfillment
of the requirements for the degree of
Doctor of Philosophy
Faculty of Business Management
AUTHOR’S DECLARATION
I declare that the work in thesis was carried out in accordance with the regulations of Universiti Teknologi MARA. It is original and is the result of my own work, unless otherwise indicated or acknowledged as referenced work. This thesis has not been submitted to any other academic institution or non-academic institution for any degree or qualification.
I, hereby, acknowledge that I have been supplied with the Academic Rules and Regulations for Post Graduate, Universiti Teknologi MARA, regulating the conduct of my study and research.
Name of Student : Wan Mohd Nazri Bin Wan Daud
Student I.D No 2005393701
Faculty Business Management
Thesis Title Related and Unrelated Diversification Strategy on Performance
Signature of Student
ABSTRACT
Diversification strategy has been debated in the fields of strategic management and finance. Inconclusive evidences pertaining to the effect of diversification strategy and debt on performance prevail in developed countries. Some studies suggest doing empirical research in developing countries to search for fresh evidence to validate those claims. This study examines the effect of diversification and debt usage on performance. Multiple proxies of performance are used namely market, economic, risk adjusted and accounting measurements in order to select the best proxy to explain the relationship among variables. The method deployed is panel data analysis on a sample of 76 Malaysian firms from various industries for the period of 1994 to 2007. These firms were then classified into 32 related firms and 44 unrelated firms based on type of diversification adopted. Independent variables such as cash flow, capital expenditure, liquidity and size were employed to provide robust evidence pertaining to the relationship between diversification, debt and performance. In addition to using the whole sample, the study also divides it into two periods: pre- and post-crisis. In determining the relationship among variables, multiple regressions were used. The results for all samples do not support the view that debt can be used to enhance performance once the unrelated diversification strategy is implemented. Similarly, debt also is not a factor that can be used to enhance performance in related diversified firms. The results remain consistent for the pre- and post-crisis periods where no significant relationship exists between diversification strategy and performance. The evidence suggests that debt clearly has a negative impact on performance. Therefore, firms should put extra caution in using debt as their financing choice. Apart from that, firms should also monitor other factors that may have a significant impact on performance such as cash flow. Future studies should explore international diversification strategy to investigate whether debt could enhance performance once unrelated strategy has lowered firm’s business risk.
ACKNOWLEDGMENTS
I would like to thank my advisor, Prof. Dr Norhana Salamudin, for her unending intellectual support and enthusiasm. Without her encouragement, I would not have completed the program. I am grateful to Prof Dr Ismail Ahmad for his continued support and stimulating discussions on all aspects of my research interests.
I would like to thank my friends and colleagues. Sincere thanks also go to Hairulnizam for his kind assistance in various ways. I am indebted to my parents especially to my mother, Habsah binti Salleh for her continuous prayers and support in completing my study, my father, Wan Daud Mohd Zain, my parents-in-law, my brothers and sisters, for their unhesitant support and understanding of my pursuits over the many years.
Special thanks goes to my wife, Dr. Azhani binti Chik, and my son, Wan Uwais Adi for having accompanied me through the often lonely yet intellectual journey. It is to them that this thesis is dedicated. Support from staffs of Universiti Teknologi MARA and Universiti Pendidikan Sultan Idris are highly appreciated.
TABLE OF CONTENTS Page AUTHOR’S DECLARATION ii ABSTRACT iii ACKNOWLEDGEMENTS iv TABLE OF CONTENTS V LIST OF TABLES X LIST OF ABBREVIATIONS xi
CHAPTER ONE: INTRODUCTION
1.1 Background of Study 1
1.2 Problem Statement 4
1.3 Research Objectives 7
1.4 Research Questions 8
1.5 Scope and Limitations 8
1.6 Significance of Study 9
1.7 Organization of Thesis 11
1.8 Chapter Summary 12
CHAPTER TWO: THEORY AND BACKGROUND OF DIVERSIFICATION STRATEGY
2.1 Introduction 13
2.2 Why Do Firms Diversify 13
2.2.1 Resource Based Theory 14
2.2.2 Transaction Cost Theory 19
2.2.3 Cash Flow Theory 20
2.2.4 Market Power Theory 21
2.2.5 Agency Theory 23
2.3 Diversification Strategy 25
