IDEAS home Printed from https://ideas.repec.org/a/gam/jjrfmx/v12y2019i1p49-d216946.html
   My bibliography  Save this article

The Impact of Corporate Diversification and Financial Structure on Firm Performance: Evidence from South Asian Countries

Author

Listed:
  • Rashid Mehmood

    (University Institute of Management Sciences, PMAS-Arid Agriculture University Rawalpindi, Punjab 46000, Pakistan)

  • Ahmed Imran Hunjra

    (University Institute of Management Sciences, PMAS-Arid Agriculture University Rawalpindi, Punjab 46000, Pakistan)

  • Muhammad Irfan Chani

    (COMSATS University Islamabad, Vehari Campus, Islamabad 45550, Pakistan)

Abstract

We examined the impact of corporate diversification and financial structure on the firms’ financial performance. We collected data from 520 manufacturing firms from Pakistan, India, Sri Lanka, and Bangladesh. We used panel data of 14 years from 2004–2017 to analyze the results. We applied a two-step dynamic panel approach to analyze the hypotheses. We found that product diversification and geographic diversification significantly affected the firms’ financial performance. We further found that dividend policy and capital structure had a significant impact on the firm’s financial performance.

Suggested Citation

  • Rashid Mehmood & Ahmed Imran Hunjra & Muhammad Irfan Chani, 2019. "The Impact of Corporate Diversification and Financial Structure on Firm Performance: Evidence from South Asian Countries," JRFM, MDPI, vol. 12(1), pages 1-17, March.
    • Handle: RePEc:gam:jjrfmx:v:12:y:2019:i:1:p:49-:d:216946
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/1911-8074/12/1/49/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/1911-8074/12/1/49/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Geoffrey C. Kiel & Gavin J. Nicholson, 2003. "Board Composition and Corporate Performance: how the Australian experience informs contrasting theories of corporate governance," Corporate Governance: An International Review, Wiley Blackwell, vol. 11(3), pages 189-205, July.
    2. Vafeas, Nikos, 1999. "Board meeting frequency and firm performance," Journal of Financial Economics, Elsevier, vol. 53(1), pages 113-142, July.
    3. Ahmed Imran Hunjra, 2018. "Mediating role of dividend policy among its determinants and organizational financial performance," Cogent Economics & Finance, Taylor & Francis Journals, vol. 6(1), pages 1558714-155, January.
    4. repec:bla:jfinan:v:59:y:2004:i:2:p:507-535 is not listed on IDEAS
    5. Sebastian LAZAR, 2016. "Determinants Of Firm Performance: Evidence From Romanian Listed Companies," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 17, pages 53-69, June.
    6. Yermack, David, 1996. "Higher market valuation of companies with a small board of directors," Journal of Financial Economics, Elsevier, vol. 40(2), pages 185-211, February.
    7. Michael J. Cooper & Huseyin Gulen & Michael J. Schill, 2008. "Asset Growth and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 63(4), pages 1609-1651, August.
    8. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    9. Wernerfelt, Birger, 1997. "On the Nature and Scope of the Firm: An Adjustment-Cost Theory," The Journal of Business, University of Chicago Press, vol. 70(4), pages 489-514, October.
    10. Saumitra Bhaduri, 2002. "Determinants of corporate borrowing: Some evidence from the Indian corporate structure," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 26(2), pages 200-215, June.
    11. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    12. Sabri Boubaker & Duc Khuong Nguyen (ed.), 2012. "Board Directors and Corporate Social Responsibility," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-38930-4, October.
    13. Jose Manuel Campa & Simi Kedia, 2002. "Explaining the Diversification Discount," Journal of Finance, American Finance Association, vol. 57(4), pages 1731-1762, August.
    14. Myers, Stewart C, 1984. "The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    15. Aivazian, Varouj A. & Ge, Ying & Qiu, Jiaping, 2005. "The impact of leverage on firm investment: Canadian evidence," Journal of Corporate Finance, Elsevier, vol. 11(1-2), pages 277-291, March.
    16. Baker, H Kent & Veit, E Theodore & Powell, Gary E, 2001. "Factors Influencing Dividend Policy Decisions of NASDAQ Firms," The Financial Review, Eastern Finance Association, vol. 36(3), pages 19-37, August.
    17. Ahmed Imran Hunjra & Hadia Naeem & Ayesha Noor & Amna Saleem, 2016. "Does Corporate Governance Play Role In Firms’ Performance? A Comparative Study of Pakistan, India and Bangladesh," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), vol. 4(9), pages 450-464, September.
    18. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    19. Bhagat, Sanjai & Bolton, Brian, 2008. "Corporate governance and firm performance," Journal of Corporate Finance, Elsevier, vol. 14(3), pages 257-273, June.
    20. Sheng-Syan Chen & Kim Wai Ho, 1997. "Market Response to Product-Strategy and Capital-Expenditure Announcements in Singapore: Investment Opportunities and Free Cash Flow," Financial Management, Financial Management Association, vol. 26(3), Fall.
    21. Joseph V. Carcello & Terry L. Neal, 2003. "Audit Committee Independence and Disclosure: choice for financially distressed firms," Corporate Governance: An International Review, Wiley Blackwell, vol. 11(4), pages 289-299, October.
    22. Berger, Philip G. & Ofek, Eli, 1995. "Diversification's effect on firm value," Journal of Financial Economics, Elsevier, vol. 37(1), pages 39-65, January.
    23. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    24. Karl V. Lins & Henri Servaes, 2002. "Is Corporate Diversification Beneficial in Emerging Market?," Financial Management, Financial Management Association, vol. 31(2), Summer.
    25. M. J. Gordon, 1963. "Optimal Investment And Financing Policy," Journal of Finance, American Finance Association, vol. 18(2), pages 264-272, May.
    26. Lewellen, Wilbur G, 1971. "A Pure Financial Rationale for the Conglomerate Merger," Journal of Finance, American Finance Association, vol. 26(2), pages 521-537, May.
    27. John A. Pearce & Shaker A. Zahra, 1992. "Board Composition From A Strategic Contingency Perspective," Journal of Management Studies, Wiley Blackwell, vol. 29(4), pages 411-438, July.
    28. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    29. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    30. Gleason, Kimberly C. & Mathur, Lynette Knowles & Mathur, Ike, 2000. "The Interrelationship between Culture, Capital Structure, and Performance: Evidence from European Retailers," Journal of Business Research, Elsevier, vol. 50(2), pages 185-191, November.
    31. Mohammad I Azim, 2012. "Corporate governance mechanisms and their impact on company performance: A structural equation model analysis," Australian Journal of Management, Australian School of Business, vol. 37(3), pages 481-505, December.
    32. Frank, Murray Z. & Goyal, Vidhan K., 2003. "Testing the pecking order theory of capital structure," Journal of Financial Economics, Elsevier, vol. 67(2), pages 217-248, February.
    33. Assem Safieddine & Sheridan Titman, 1999. "Leverage and Corporate Performance: Evidence from Unsuccessful Takeovers," Journal of Finance, American Finance Association, vol. 54(2), pages 547-580, April.
    34. Lex Donaldson & James H. Davis, 1991. "Stewardship Theory or Agency Theory: CEO Governance and Shareholder Returns," Australian Journal of Management, Australian School of Business, vol. 16(1), pages 49-64, June.
    35. Bernard S. Black & Antonio Gledson de Carvalho & Érica C. R. Gorga, 2009. "The Corporate Governance of Privately Controlled Brazilian Firms," Brazilian Review of Finance, Brazilian Society of Finance, vol. 7(4), pages 385-428.
    36. Mak, Y.T. & Kusnadi, Yuanto, 2005. "Size really matters: Further evidence on the negative relationship between board size and firm value," Pacific-Basin Finance Journal, Elsevier, vol. 13(3), pages 301-318, June.
    37. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411-411.
    38. Chung, Kee H. & Wright, Peter & Charoenwong, Charlie, 1998. "Investment opportunities and market reaction to capital expenditure decisions," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 41-60, January.
    39. Schmid, Markus M. & Walter, Ingo, 2012. "Geographic diversification and firm value in the financial services industry," Journal of Empirical Finance, Elsevier, vol. 19(1), pages 109-122.
    40. Beck, Thorsten & Demirguc-Kunt, Asli, 2006. "Small and medium-size enterprises: Access to finance as a growth constraint," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2931-2943, November.
    41. Claessens, Stijn & Yurtoglu, B. Burcin, 2013. "Corporate governance in emerging markets: A survey," Emerging Markets Review, Elsevier, vol. 15(C), pages 1-33.
    42. repec:bla:jfinan:v:43:y:1988:i:1:p:1-19 is not listed on IDEAS
    43. Butt, Babar Zaheer & Hunjra, Ahmed Imran & Rehman, Kashif-Ur-, 2010. "Financial management practices and their impact on organizational performance," MPRA Paper 32685, University Library of Munich, Germany.
    44. Xie, Biao & Davidson, Wallace III & DaDalt, Peter J., 2003. "Earnings management and corporate governance: the role of the board and the audit committee," Journal of Corporate Finance, Elsevier, vol. 9(3), pages 295-316, June.
    45. repec:elg:eebook:14347 is not listed on IDEAS
    46. Denis, David J & Denis, Diane K & Sarin, Atulya, 1997. "Agency Problems, Equity Ownership, and Corporate Diversification," Journal of Finance, American Finance Association, vol. 52(1), pages 135-160, March.
    47. Ahmed Imran Hunjra & Muhammad Irfan Chani & Sehrish Javed & Sana Naeem & Muhammad Shahzad Ijaz, 2014. "Impact of Micro Economic Variables on Firms Performance," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), vol. 2(2), pages 65-73, February.
    48. James E. Walter, 1963. "Dividend Policy: Its Influence On The Value Of The Enterprise," Journal of Finance, American Finance Association, vol. 18(2), pages 280-291, May.
    49. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
    50. Titman, Sheridan & Wei, K. C. John & Xie, Feixue, 2004. "Capital Investments and Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(4), pages 677-700, December.
    51. Adebayo G. Oloidi & Patrick O. Adeyeye, 2014. "Determinants of Dividend per Share: Evidence from the Nigerian Stock Exchange," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), vol. 2(12), pages 496-501, December.
    52. Duc Nam Phung & Anil V. Mishra, 2016. "Corporation Diversification and Firm Performance: Evidence from Vietnamese Listed Firms," Australian Economic Papers, Wiley Blackwell, vol. 55(4), pages 386-408, December.
    53. Gao, Wenlian & Chou, Julia, 2015. "Innovation efficiency, global diversification, and firm value," Journal of Corporate Finance, Elsevier, vol. 30(C), pages 278-298.
    54. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    55. Erickson, John & Park, Yun W. & Reising, Joe & Shin, Hyun-Han, 2005. "Board composition and firm value under concentrated ownership: the Canadian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 13(4), pages 387-410, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fiaz Ahmad Sulehri & Usman Ahmed & Wajid Alim, 2021. "Black Economy, Financial Inclusion, Financial Liberalization Nexus: A Panel Analysis Of Developing Countries," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 10(3), pages 65-77.
    2. Hunjra, Ahmed Imran & Jebabli, Ikram & Thrikawala, Sujani Sudhara & Alawi, Suha Mahmoud & Mehmood, Rashid, 2024. "How do corporate governance and corporate social responsibility affect credit risk?," Research in International Business and Finance, Elsevier, vol. 67(PA).
    3. Kravchenko Grygorii, 2021. "International Experts’ Influence on Company Internationalization," Journal of Management and Business Administration. Central Europe, Sciendo, vol. 29(4), pages 57-90, December.
    4. Rana Muhammad Shahid Yaqub & Nazim Hussain & Shanayyara Mahmood & Zahra Farooq, 2021. "Linking Compensation, Employee Engagement, Employee Loyalty And Organizational Performance: The Mediating Role Of Organization Commitment," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 10(3), pages 17-32.
    5. Md. Hasanur Rahman & Alfarunnahar Ruma & Mohammad Nasir Hossain & Rifat Nahrin & Shapan Chandra Majumder, 2021. "Examine the Empirical Relationship between Energy Consumption and Industrialization in Bangladesh: Granger Causality Analysis," International Journal of Energy Economics and Policy, Econjournals, vol. 11(3), pages 121-129.
    6. Ahmed Imran Hunjra & Qasim Zureigat & Rashid Mehmood, 2020. "Impact of Capital Regulation and Market Discipline on Capital Ratio Selection: A Cross Country Study," IJFS, MDPI, vol. 8(2), pages 1-13, April.
    7. Geetanjali Pinto & Shailesh Rastogi, 2019. "Sectoral Analysis of Factors Influencing Dividend Policy: Case of an Emerging Financial Market," JRFM, MDPI, vol. 12(3), pages 1-18, June.
    8. Anh Huu Nguyen & Duong Thuy Doan & Linh Ha Nguyen, 2020. "Corporate Governance and Agency Cost: Empirical Evidence from Vietnam," JRFM, MDPI, vol. 13(5), pages 1-15, May.
    9. Beatrice Sarpong‐Danquah & Michael Adusei & Joseph Magnus Frimpong, 2023. "The capital structure–firm performance nexus: The role of judicial efficiency," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(3), pages 1585-1600, April.
    10. Sin-Huei Ng & Tze San Ong & Boon Heng Teh, 2019. "An Agency Perspective on Firm Diversification, Efficiency and Performance: Evidence From Malaysia," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 10(6), pages 24-41, October.
    11. Ana Maria Alexie, 2022. "Trends in corporate governance practices at the level of companies listed on the Bucharest Stock Exchange," Journal of Financial Studies, Institute of Financial Studies, vol. 12(7), pages 25-37, May.
    12. Ahmed Imran Hunjra & Rashid Mehmood & Tahar Tayachi, 2020. "How Do Corporate Social Responsibility and Corporate Governance Affect Stock Price Crash Risk?," JRFM, MDPI, vol. 13(2), pages 1-15, February.
    13. Suha Alawi, 2024. "The Role of Corporate Social Responsibility, Ownership Structure, and Gender Diversity in Firm Performance," International Journal of Economics and Financial Issues, Econjournals, vol. 14(2), pages 97-110, March.
    14. Xin Li & Qiong Xu & Fei Guo & Hecheng Wang, 2023. "State‐owned equity participation and private sector enterprises' strategic risk taking: Evidence from China," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(2), pages 1107-1124, March.
    15. Anisa Safiah Maznorbalia & Muhammad Aiman Awalluddin & Ardzlyn Hawatul Yuhanis Ayob, 2023. "Exploring the role of institutional investors in voting, monitoring and dialogue engagement in mitigating agency conflict in Malaysia’s public listed companies," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-9, December.
    16. Bo Peng, 2024. "Corporate governance and its impact on financial performance and innovation in Chinese‐listed firms," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(3), pages 1598-1609, May.
    17. Grygoriy Shamborovskyi & Yuliia Nehoda & Nataliya Demidova & Volodymyr Tarashchenko & Svitlana Breus, 2021. "Modeling Study on Risk Identification in the Process of Anti-Crisis Enterprise Management," JRFM, MDPI, vol. 14(2), pages 1-14, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hussein Abedi Shamsabadi & Byung-Seong Min & Richard Chung, 2016. "Corporate governance and dividend strategy: lessons from Australia," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 12(5), pages 583-610, October.
    2. Jouida, Sameh, 2018. "Diversification, capital structure and profitability: A panel VAR approach11We are grateful to the editor and the anonymous reviewer for their valuable comments," Research in International Business and Finance, Elsevier, vol. 45(C), pages 243-256.
    3. Paulo, Alves, 2018. "Abnormal retained earnings around the world," Journal of Multinational Financial Management, Elsevier, vol. 46(C), pages 63-74.
    4. Khawaja, Mohsin & Bhatti, M. Ishaq & Ashraf, Dawood, 2019. "Ownership and control in a double decision framework for raising capital," Emerging Markets Review, Elsevier, vol. 41(C).
    5. Darakhshan Younis & Attiya Yasmin Javid, 2014. "Market Imperfections and Dividend Policy Decisions of Manufacturing Sector of Pakistan," PIDE-Working Papers 2014:99, Pakistan Institute of Development Economics.
    6. Mário Santos & António Moreira & Elisabete Vieira, 2014. "Ownership concentration, contestability, family firms, and capital structure," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 18(4), pages 1063-1107, November.
    7. Elif Acar & Gamze Vural & Emin Hüseyin Çetenak, 2020. "Evidence for Financial Hierarchy Theory in Capital Structure Decisions: Data from BIST Companies," Bogazici Journal, Review of Social, Economic and Administrative Studies, Bogazici University, Department of Economics, vol. 34(1), pages 29-50.
    8. Le, Thi Phuong Vy & Phan, Thi Bich Nguyet, 2017. "Capital structure and firm performance: Empirical evidence from a small transition country," Research in International Business and Finance, Elsevier, vol. 42(C), pages 710-726.
    9. Mohamed, Hisham Hanifa & Masih, Mansur & Bacha, Obiyathulla I., 2015. "Why do issuers issue Sukuk or conventional bond? Evidence from Malaysian listed firms using partial adjustment models," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 233-252.
    10. Zhang, Dongyang & Liu, Deqiang, 2017. "Determinants of the capital structure of Chinese non-listed enterprises: Is TFP efficient?," Economic Systems, Elsevier, vol. 41(2), pages 179-202.
    11. Renneboog, L.D.R. & Trojanowski, G., 2005. "Control Structures and Payout Policy," Other publications TiSEM a82281ef-f247-479f-a0e3-1, Tilburg University, School of Economics and Management.
    12. Trojanowski, G., 2004. "Ownership structure as a mechanism of corporate governance," Other publications TiSEM 5dbc874d-d1d0-44a5-9717-8, Tilburg University, School of Economics and Management.
    13. Paolo Saona & Pablo San Martín, 2018. "Determinants of firm value in Latin America: an analysis of firm attributes and institutional factors," Review of Managerial Science, Springer, vol. 12(1), pages 65-112, January.
    14. Sofiane DELFOUF, 2016. "The Determinants of the Financing Decision: A panel Data Study of Listed Firm in Malaysian Stock Exchange (2005-2016)," Turkish Economic Review, KSP Journals, vol. 3(4), pages 668-676, December.
    15. Ebrahim, M. Shahid & Girma, Sourafel & Shah, M. Eskandar & Williams, Jonathan, 2014. "Dynamic capital structure and political patronage: The case of Malaysia," International Review of Financial Analysis, Elsevier, vol. 31(C), pages 117-128.
    16. Elsas, Ralf & Florysiak, David, 2008. "Empirical Capital Structure Research: New Ideas, Recent Evidence, and Methodological Issues," Discussion Papers in Business Administration 4743, University of Munich, Munich School of Management.
    17. Niluthpaul Sarker & Roushanara Islam, 2021. "Issues on Bank’s Capital Structure and Profitability: A Developing Country Context," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(1), pages 86-104.
    18. José López-Gracia & Francisco Sogorb-Mira, 2008. "Testing trade-off and pecking order theories financing SMEs," Small Business Economics, Springer, vol. 31(2), pages 117-136, August.
    19. Szilagyi, P.G., 2007. "Corporate governance and the agency costs of debt and outside equity," Other publications TiSEM 9520d40a-224f-43a8-9bf9-b, Tilburg University, School of Economics and Management.
    20. Serrasqueiro, Zélia & Nunes, Paulo Maçãs, 2010. "Non-linear relationships between growth opportunities and debt: Evidence from quoted Portuguese companies," Journal of Business Research, Elsevier, vol. 63(8), pages 870-878, August.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jjrfmx:v:12:y:2019:i:1:p:49-:d:216946. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.