The Impact of Unrelatedness on Firm Diversification under Adverse Industry Conditions

Abstract

This paper proposes a series of hypotheses that suggest that environmental adversity might motivate firms to diversify into progressively less-related areas so that they can learn new knowledge and competencies that could help them to cope with environmental challenges. In particular, it is elaborated on a case to explain why stock market reactions are likely to be negative for firms that carry out unrelated diversification when they experience adverse industry conditions. Results of regression model indicate that year-specific effects and the acquirers' degree of leverage have significant associations with the degree of un-relatedness of the firms' diversification actions. On the other hand, results of proposed model indicate that the negative association between the firm's diversification action's level of unrelatedness and stock market reaction to such actions is more negative under conditions of high industry adequacy.