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Diversification and risk-adjusted performance: A quantile regression approach

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  • Lee, Bong Soo
  • Li, Ming-Yuan Leon

Abstract

The effect of diversification on firm performance has been debated. We reexamine the effect using a sample of 44,248 observations of non-financial US firms for the 1997–2009 period employing the quantile regression approach. Our empirical results show that the effect of diversification on firm performance is not homogeneous across various quantile levels: the diversification discount (premium) shows up in firms with high (low) RoE quantiles. Further, we find that diversification affects firm risk as well. Therefore, we consider a risk-adjusted performance measure and find that both diversification discount and premium disappear, which is consistent with the risk-return trade-off principle.

Suggested Citation

  • Lee, Bong Soo & Li, Ming-Yuan Leon, 2012. "Diversification and risk-adjusted performance: A quantile regression approach," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 2157-2173.
    • Handle: RePEc:eee:jbfina:v:36:y:2012:i:7:p:2157-2173
    DOI: 10.1016/j.jbankfin.2012.03.020
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    More about this item

    Keywords

    Diversification; Risk-adjusted performance; Quantile regression;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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