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Industrial Diversification and Risk in an Emerging Market: Evidence from Turkey

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Abstract

In this study, we analyze the relationship between industrial diversification and risk among the Turkish firms listed in the Borsa Istanbul using data from 2005 to 2012. These analyses make use of static and dynamic panel data models. The study indicates that diversification is negatively related to firm-specific risk and total risk in industrially diversified firms. Furthermore, the study demonstrates that the firm-specific risk and total risk of industrially diversified firms are lower than those of single-business firms.

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... An important aspect in diversification is the adoption of the best strategy that suits a firm's needs, objectives, vision and mission. Essentially, this can be achieved via the internal development of new products/markets, acquisitions, alliance, licensing, franchising or a combination of various modes of entry (Yücel and Önal, 2015). Since diversification is either an offensive or defensive strategy, it is fraught with inherent risks, which can lead to the rapid growth and profitability of a firm. ...
... including South Africa) both as job creators and income redistribution agents (Hisrich. Peters and Shepherd, 2013;Yücel and Önal, 2015). ...
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This study’s primary objective is to determine the impact that the JSE’s AltX has on listed firm’s performance and the level of entrepreneurship in South Africa. Its secondary objective was to quantitatively determine whether there exists a link between increased capitalisation of the AltX and the expansionary drive of listed firms, as well as to ascertain the impact that the listing requirements of the AltX has on the broad-based black economic empowerment (B-BBEE) score performance of listed firms. In order to achieve the methodological objectives of this study, mixed methods was used to measure this phenomenon which led to the development of an integrated model for the JSE’s AltX listed firms, as well as for intending small and medium enterprises (SMEs) that might want to list. Accordingly, the researcher employed pragmatic research paradigm and conducted two types of analysis. Firstly, quantitative analysis which is based on primary and secondary data was conducted followed by a qualitative analysis based on a qualitative semi-structured case study. It was found that the JSE's AltX positively impacts on the performance of listed firms and the level of entrepreneurship in South Africa. Most especially as increased capitalisation levels was positively linked with the expansionary drive of these registered firms. And that the listing requirements of the AltX had a net positive effect on the B-BBEE score performance of these companies. Practically, by virtue of being listed many SMEs would generate enough capital and buzz to facilitate their expansion. This study also contributes to new knowledge by recommending that the JSE's AltX develop a custom-made business-friendly targeted listing procedure. Just as policy makers are encouraged to create a one-stop-shop investment portal which would streamline the activities of government agencies for the benefit of Small, Medium and Micro-Enterprises (SMMEs) in South Africa. The researcher proposes that future research would extend beyond South Africa, across the SADC, Africa or even across continents. Besides, a 3-level multi-level modelling (MLM) equation testing procedure was conducted to test the efficacy of firm listing, using IBM SPSS Statistics version 27 statistical software package. Quantitative analysis, comprising: quantitative analysis of primary data from survey questionnaire (investigated whether location or sector impacts on firm performance), and quantitative analysis of secondary data (determined if the number of both SMMEs and the JSE's AltX listed companies impacts on firm performance and the level of entrepreneurship in South Africa). Using participants' sample from sixty JSE's AltX listed firms who were either CEOs/directors/top management team members, and ten interviewees (i.e. for the qualitative analysis, comprising: qualitative analysis of primary data from semi-structured case study), this study's triangulated findings and conclusions became more valid and reliable. Evidence provided by the ensuing econometric analysis suggests that: Firstly, firms that are listed on the JSE’s AltX were more likely to perform better than their unlisted peers (i.e. both formal and informal SMMEs). Thus, this helped listed firms to improve their company’s performance, corporate profile, loan amount and profits, as well as assisted in securing a major investor for the firm. Besides, it was observed that the variation in the dataset occurred within sectors between the JSE's AltX variable parameters at Level 1. This positively impacted on the AltX market capitalisation, total number of employed personnel, foreign assets, as well as the total equity and liabilities of the JSE's AltX listed firms. Secondly, listing on the JSE’s AltX was found to be positively associated with the level of entrepreneurship in South Africa. There was evidence that listing boosted the level of creativity and innovation in South Africa, as well as encouraged entrepreneurial risk taking, and also increased business confidence levels. Furthermore, it was observed that the variation in the dataset occurred within sectors between the JSE's AltX variable parameters at Level 1. Likewise, the turnover, AltX market capitalisation, the total investments and loans, as well as the earnings yield of the JSE's AltX listed firms were positively linked with the level of entrepreneurship in South Africa. Thirdly, the rising share capitalisation of listed firms on the AltX was linked to an increased likelihood for company expansion. In addition, listing led to international firm exposure and industry position consolidation. However, the corporate bonds and equities sold by these listed firms on the AltX did not guaranty the long-term sustainability of their business. Also, it was observed that the variation in the dataset occurred within sectors between the JSE's AltX variable parameters at Level 1. Correspondingly, the qualitative case analysis indicated that listing on the AltX led to a high yield but with lower multiples, higher return on equity, joint ventures and acquisitions, share ownership dilution, debt reduction, more capital disbursement and risk diversification, and it also led to firm growth and economic development, which was good. Fourthly, higher compliance requirements for listing on the AltX, increased the likelihood that there would be improvements in quoted B-BBEE performance score. Equally, the implementation of good governance systems like the B-BBEE by listed firms made them more attractive to stakeholders. On the other hand, when the B-BBEE score of these listed firms becomes the regressand, listing had an undesirable effect on their value added, patents and trademarks in relation to company performance. This study therefore opens-up a new vista for examining the performance of listed firms in South Africa, which is a significant contribution to new knowledge.
... Instead, they argue that countries with more liberalized capital markets appear less vulnerable to such shocks. There are also a large number of factors that may affect the sensitivity of the EMEs' responses to adverse external shocks, such as exchange rate regimes (Mendis 2002;Broda 2004;Hoffmann 2007), compositions of sovereign or external debt (Elkhishin and Mohieldin 2021;Cassard and Folkerts-Landau 1997), industrial diversification (Lins and Servaes 2002;Yücel and Önal 2015), foreign reserves (Alberola et al. 2016;Carvalho 2009), and primary-commodity exporting (Gevorkyan 2019;Arezki et al. 2014). Meanwhile, there is mixed evidence of a relationship between trade openness and the FX rate. ...
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This study investigates the role of external shocks on the stability of the foreign exchange(FX) market in a large panel of fifty advanced and emerging economies. I allow each country’s response of FX rate and capital inflows to vary according to institutional and economic factors through local projection methodology with country-level panel data. The results show that the negative impact of external shocks, such as US monetary policy and geopolitical risks, on the small open economies is substantial. Moreover, unanticipated US monetary tightening has a greater impact on exchange rates and capital inflows in emerging market economies compared to advanced economies. Furthermore, I test for state-dependence of the responses and discover that the effects of external shocks on the foreign exchange market are more pronounced in economies with a high sovereign debt ratio, high external debt ratio, or commodity-exporting ones. In addition, an economy with a high degree of trade openness or highly diversified exports is more likely to alleviate the negative spillovers of external shocks to the FX market.
... An important research subject is the risk of diversification projects (Yücel & Önal, 2015;Busse et al., 2014;Jafarinejad et al., 2018). Diversification processes in corporate networks are also analysed (Chen & Jaw, 2014;Kim et al., 2014;Aivazian et al., 2019). ...
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Various indicators are used to determine the level of company diversification. Their adequacy largely depends on the structure of the production programme. Its essential feature is the comparative weight of the main product in the total scope of the company’s work. In this situation, the intensity of the diversification process is reflected by the decrease in the volume of this product due to the inclusion of new products in the production programme. In this case, the adequacy of the diversification indicator can be reflected by comparing the scale of the main product with changes in the value of these indicators. The adequacy will be higher with more changes in the values of diversification indicators corresponding to changes in the volumes of the main product. Four indicators of corporate diversification are the most well-known and widely used: the Berry index, the entropy measure, Utton’s measure and the DG index. All of them have both strong and weak sides, so it is important to determine situations of the company’s production programme in which diversification indicators are appropriate to use, i.e., in which situations their adequacy is the greatest. The research has established that if the comparative weight of the main product of the production programme in the total scope of work is greater than 0.5, then the adequacy of the entropy measure and index DG is higher compared to the Berry index and Utton’s measure. If it is lower than 0.5, the other two diversification indicators should be used. The obtained results will help to more efficiently manage the process of diversification as a company’s development strategy.
... Many studies focus on the impact of corporate ownership on the processes of diversification (Chung, 2013;Hernández-Trasobares & Galve-Górriz, 2016;Schmid et al., 2015;Sanchez-Bueno & Usero, 2014). Geographical diversification of business companies (Chonghui et al., 2013;Thoumrungroje & Tansuhaj, 2005;Gaur & Delios, 2015;Qian et al., 2013;Yahaya et al., 2009;Mauer et al., 2015), diversification risks (Busse et al., 2014;Yücel & Önal, 2015), the processes of diversification in business networks (Kim et al., 2014;Chen & Jaw, 2014) are areas of continuous interest among researchers. ...
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Corporate activity diversification is a promising but at the same time risky condition of a company’s adaptation to the business environment. Effectiveness of diversification processes in enterprises may be achieved by research in the following areas: development of methods of internal and external business environment analysis as a basis for diversification decisions; understanding the dependence of the scope and nature of corporate activity diversification on the market situation; providing science-based advice for the management of diversified companies, especially large ones; improvement in the methods of diversification measuring so that a complex analysis of the diversification process would become implementable. Based on the study of the Lithuanian construction sector, this paper seeks to provide new insights into the following aspects of corporate activity diversification: preconditions and conditions for deciding on corporate activity diversification; the problem of the scale and nature of diversification; organisational management conditions for the success of diversification projects. Furthermore, an in-depth discussion of the problematic of measuring the achieved level of diversification is offered.
... By combining equations in differences with equations in levels, the system GMM estimator uses lagged levels as instruments for differenced equations and lagged differences as instruments for level equations. Finally, to control the problem of endogeneity, the extant research identified industry attractiveness as an instrument for both diversification and firm performance variables (see Lang and Stulz, 1994;Campa and Kedia, 2002;Yücel and Önal, 2015). Following Bhatia and Thakur (2018) industry attractiveness is computed by dividing sales of all diversified firms in a particular industry with the total sales of the industry. ...
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We investigate further the inconsistencies of the diversification–performance nexus by introducing information asymmetry as a mediating factor. Data of 12,176 firms from eleven developing, emerging and developed economies over the 2010–2017 period were used to conduct a panel data analysis excluding the financial industries. To test the impact of corporate diversification on firm performance, we use a firm-year fixed effects panel data model to control for firm heterogeneity and any other unobservable firm-level attributes, for example, management quality, corporate norms, and culture which are supposed to be time-invariant and may influence the results. The findings are qualitatively valid when we use system dynamic panel data General Methods of Moments (GMM) estimator for endogeneity concerns. Besides, we follow a three-step procedure proposed by Muller and Judd (J Pers Soc Psychol 89(6):852–863, 2005) to test the potential mediating effect of information asymmetry. We find that industrial diversification is significantly and positively associated with firm performance while international diversification shows no effect on performance in developing and emerging markets. We also find that information asymmetry strongly mediates the relationship between corporate diversification strategies and firm performance in developing and emerging economies as compared to developed economies. Our findings suggest that corporate diversification is not considered as a value decreasing strategy that calls for more attention of regulators on enabling managers to show the potential advantages of corporate diversification that generates a positive signal to shareholders.
... The above positive views regarding diversification and firms' performance are also consistent with agency theory and transaction cost theory. According to Yücel and Önal (2015), agency theory and transaction cost theory provide explanations for the rationality of diversification in line with improved performance. According to their view, the agency theory proposes that managers are inclined to strengthen their existing positions in the firm and reduce their risks by engaging in diversified investments compatible with their skills. ...
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This paper presents specification tests that are applicable after estimating a dynamic model from panel data by the generalized method of moments (GMM), and studies the practical performance of these procedures using both generated and real data. Our GMM estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables. We propose a test of serial correlation based on the GMM residuals and compare this with Sargan tests of over-identifying restrictions and Hausman specification tests.
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This study examines the effects of international and product diversification on capital structure with 232 firms from 30 countries. Results for the full sample show that international diversification is negatively related to financial leverage, but further analyses indicate that this is mainly attributable to US firms. For non-US firms, we fail to find a significant relationship. Results also show that product diversification is positively related to financial leverage, indicating that such diversification allows firms to reduce their risks, thereby enabling firms to carry higher debt levels.
Article
This paper argues that the documented discount on diversified firms is not per se evidence that diversification destroys value. Firms choose to diversify. We use three alternative econometric techniques to control for the endogeneity of the diversification decision, and find evidence supporting the self-selection of diversifying firms. We find a strong negative correlation between a firm's choice to diversify and firm value. The diversification discount always drops, and sometimes turns into a premium. There also exists evidence of self-selection by refocusing firms. These results point to the importance of explicitly modeling the endogeneity of the diversification status in analyzing its effect on firm value. Copyright The American Finance Association 2002.
Article
This paper investigates the impact of international migration on technical efficiency, resource allocation and income from agricultural production of family farming in Albania. The results suggest that migration is used by rural households as a pathway out of agriculture: migration is negatively associated with both labour and non-labour input allocation in agriculture, while no significant differences can be detected in terms of farm technical efficiency or agricultural income. Whether the rapid demographic changes in rural areas triggered by massive migration, possibly combined with propitious land and rural development policies, will ultimately produce the conditions for a more viable, high-return agriculture attracting larger investments remains to be seen.
Article
This paper examines whether electoral motives and government ideology influence short-term economic performance. I employ data on annual GDP growth in 21 OECD countries over the 1951-2006 period and provide a battery of empirical tests. In countries with two-party systems GDP growth is boosted before elections and, under leftwing governments, in the first two years of a legislative period. These findings indicate that political cycles are more prevalent in two-party systems because voters can clearly punish or reward political parties for governmental performance. My findings imply that we need more elaborate theories of how government ideology and electoral motives influence short-term economic performance.
Article
Using the result that under the null hypothesis of no misspecification an asymptotically efficient estimator must have zero asymptotic covariance with its difference from a consistent but asymptotically inefficient estimator, specification tests are devised for a number of model specifications in econometrics. Local power is calculated for small departures from the null hypothesis. An instrumental variable test as well as tests for a time series cross section model and the simultaneous equation model are presented. An empirical model provides evidence that unobserved individual factors are present which are not orthogonal to the included right-hand-side variable in a common econometric specification of an individual wage equation.
Article
The aim of this paper is to examine the degree to which the determinants of SMEs' capital structures differ between European countries. The study is based on data for four thousand SMEs, five hundred from each of eight European countries. Regressions were run using short-term and long-term debt as dependent variables and profitability, growth, asset structure, size and age as independent variables. A key feature of this paper is the use of restricted and unrestricted regressions to isolate the country-effect from the firm-specific-effect. The results show that variations are likely to be due to country differences as well as firm-specific ones. Copyright Blackwell Publishers Ltd, 2004.
Firm diversification and earnings volatility: An empirical analysis of U.S.-Based MNCs
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