Exploring the linkage between Diversification Strategies and Financial Strategies of selected Indian Firms

 

Dr. Yamini Karmarkar¹*, Ms. Matreye Jain², Mr. Rounak Wadhva³

¹Reader, International Institute of Professional Studies, Devi Ahilya University Takshashila Campus, Khandwa Road, Indore, Madhya Pradesh, India.

²Research Scholar, International Institute of Professional Studies, Devi Ahilya University Takshashila Campus, Khandwa Road, Indore, Madhya Pradesh, India.

³Student, International Institute of Professional Studies, Devi Ahilya University Takshashila Campus, Khandwa Road, Indore, Madhya Pradesh, India.

 

ABSTRACT:

The empirical investigation of relation between the diversification and financial strategies of firms has been an area of interest for studies in recent past. The present study attempts to address the significant issues related to diversification on Indian Firms. It precisely tries to explore whether there is any relationship between “Extent of Diversification” and “Financial Strategy” of Selected Indian Firms? Is there any relationship between “Diversification Strategy” and “Financial Strategy” of Selected Indian Firms? An empirical analysis of the extent of diversification and diversification strategy of top 30 companies (Market Capitalisation) listed in the Bombay Stock Exchange is done for a single period (2015-16) by using ANOVA. Bankruptcy risk, systematic risk, unsystematic risk, leverage and firm size are the variables used to measure Financial Strategy of Firm and NIC codes are used to measure extent of diversification while diversification strategy is defined in terms of mode of entry adopted by the firm for new business. The results of the study show that diversified firms are at higher level of risk- particularly unsystematic and Bankruptcy risk. Moreover, no significant relationship was observed in mode of entry and Financial Strategy of the firm. This study is expected to help mangers in taking diversification decisions.

 

 

 

INTRODUCTION:

Over the past few decades, the financial literature focused on the firm’s financing policy i.e. capital structure, the importance of strategic variables has recently been recognised   (Harris and Raviv, 1999). In this context, this research explores the linkages between the diversification strategies and the financial strategies. Corporate strategy is defined as the company’s overall direction towards growth by managing the portfolio of different activities of an organization. Operationally, this

 

can be seen as the level of diversity achieved, the mode used to achieve that level of diversity and the management of the diversified set of assets and business (Ramanujam and Varadarajan, 1989). Capital structure is the one of the critical decision in any firm; as it decides the overall cost of capital and market value of the firm. And it has to be decided whenever the firm starts its operations or need additional funds to finance its new projects.

 

Diversification is a popular growth option for firms in both developed (Datta et al. 1991) and emerging countries (Kakani 2000). Besides the advantages of increased revenues and opportunities to spread risks, it has the potential to create shareholder value through the exploitation of economies of scope and the creation of efficient internal capital and labour markets. Diversification of firms is one of the reasons for increase the GDP of a country (Chenery, 1979). Meaning of diversification is different for researchers. To Gort (1962) it means output serving number of industry. To Berry (1975) an increase in the number of industries in which firms are active. According to Ansoff (1957, 1965), diversification means the entry of firm into new market with new products. For Booze, Allen and Hamilton define the diversification as spreading the base to achieve improved growth with low risk to achieve goals of firm. This definition tries to capture the goal and its direction. But it fails to include administrative linkages and process aspects. Once the firm has decided to diversify; the next step where is to diversify. Study of diversification by European countries by Booze Allen and Hamilton use following dimension for direction to diversify: Technology, Product and Services, Geographic market, Customer Segment and distribution channel. Such diversification is commonly known as related diversification. Many time companies reduce cost by integrating forward and backward. Such diversification is unrelated diversification.

 

The economy of India is the seventh-largest economy in the world. The country is classified as a newly industrialised country, one of the G-20 major economies, a member of BRICS and a developing economy with an average growth rate of approximately 7% over the last two decades. Post liberalisation, Indian economy has seen several phases of growth - average growth rate of 9% during period 2003 to 2007, economic slowed down in 2008 due financial crisis, further slow down upto 5.7 % in 2012 and a recovery in 2014-15 to 7.2%. In 2015, Indian went through a start-up boom and manufacturing growth skyrocketing due to which the growth in 2015-16 accelerated to 7.6%.  According “Financial Times” India took over China and US as top destination for investment. To further increase investment Government of India liberalized FDI for 25 Sectors like Insurance, Defence and etc. FDI in India witnessed an increase of 29 per cent and reached US$ 40 billion during April 2015-March, 2016 as compared to US$ 30.93 billion in the same period year 2015. (Source- www.ibef.org)

 

Before the Indian economy opened up in 1991, Indian firms diversified primarily based on the licenses that they were able to obtain from the government. The post-liberalization era saw companies make a beeline for high growth sectors, including information technology, film production, retail, private equity, real estate and telecommunications. A 2007 boom period spawned a fresh wave of diversifications: Players including the Aditya Birla Group, Reliance Industries and Bharti entered in retail segments. Others like engineering giant Larsen and Toubro; auto major Mahindra and Mahindra and forging heavyweight Bharat Forge pursued huge potential in the defense market.

 

The growth opportunities available for Indian companies have provided ample scope for diversification, restructuring and expansion. Companies have adopted several strategies for entering new business – ranging from mergers, acquisitions, joint ventures etc. Further, companies have also adopted varying strategies for selecting the industries for expansion – related, unrelated, vertical, horizontal diversifications etc. It is worth mentioning that the risk involved in these diversifications is different. Firm risk, business risk, interest rate risk etc. vary across firms and across industries. Capital investment also varies across different sectors. Past literature shows some relationship between Diversification strategies, mode of entry and different types of risk. Most of the Capital studies on diversification have focused on the “extent” of diversification (less or more diversification), the “directions” (related or unrelated) and the “mode” (diversification via internal expansion or mergers and acquisitions or choices of mergers and acquisitions strategies).

 

There are studies which talk about capital structure and diversification. But, these studies do not explain the association between extent of diversification and collective financial strategy of firms. Moreover, there is hardly any literature available in Indian context.

 

Therefore, this study tries to explore the relationship between financial strategy and diversification. Financial Strategy is defined in terms of Leverage, Firm Size and Firm Risk.  Diversification is explored in two dimensions – extent of diversification and diversification strategies i.e. mode of entry in new venture.

 

1.                    Is there any relationship between “Extent of Diversification” and “Financial Strategy” of Selected Indian Firms?

2.                    Is there any relationship between “Diversification Strategy” and “Financial Strategy” of Selected Indian Firms?

 

The paper presents the literature review in Section II. Section III discusses the objective of the study. Section IV gives a brief description of variables, models and sample used in the study. Results and discussions are elaborated in Section V. Section VI concludes with recommendations. Finally, Section VII discusses the limitation and scope of future studies. 

 

 

 

LITERATURE REVIEW:

 Many numbers of researches had been done on Diversification.  The variables like firm performance, profitability, systematic and unsystematic risk, capital structure, source of financing, nature of business entered, related and unrelated diversification etc. are studied in past researches. The wide number researches on topic of diversification which raises many questions and show light on number of aspects of it. But there is no conclusive study. Diversification is very dynamic and changing in nature as its effect on variables also varies from place to place and also time to time. Most of the diversification theory explains the debt versus equity proportions. But there is no such fixed right proportions debt and equity which is right.

 

Capital Structure and Diversification: -

Early financial theorists suggested that financing decisions may be ‘irrelevant’ for firm strategy (Modigliani–Miller, 1958), but recent research indicates that such choices may differentially affect firm value largely because of market imperfections (Myers and Majluf, 1984). Several strategy scholars have argued that the financial decisions and financial resources have strategic importance (Barton and Gordon, 1988; Bromiley, 1990; Chatterjee, 1990; Chatterjee and Wernerfelt, 1991); argued that capital structure affects corporate governance that, in turn, affects strategies chosen by top executives.  It may also be suggested that the Diversification influences the capital structure of any firms through its impact on the firm’s performance and risk.

 

Literature supports the potential linkages between diversification strategy and firms’ financing choice. Past studies have suggested that including diversification strategies in the analysis of firm financing may provide additional insights into capital structure decisions Equity financing is preferred for related diversification and debt financing for unrelated diversification because related diversification introduces more specific assets, whereas unrelated diversification adds assets that less specific to the firm Kochhar and Hitt (1998) and their research had concluded that a firm’s financial strategy is influenced by its diversification strategy and that a firm’s capital structure simultaneously influences its diversification strategy. Maurizio et.al (2007) studied the call for integration between finance and strategy research on examining how financial decisions are related to corporate strategy by using the literature on finance and strategy which indicates that how the strategic actions of key players affect value of firm and the allocation of value between claimholders. Larry D. Su (2010) argues that debt level of firm do not increase if it is related diversification and when in unrelated diversification debt level of firm increase.

Firm’s Performance and Diversification: -

When most of the studies tried to find relationship between diversification and firm’s performance For example, in developed economies, Rhodes (1973) and Chatterjee (1986) have advocated a positive relationship; Bettis and Hall (1982) and Perry (1998) have found a negative or no relationship between diversification and firm performance. The situation is similar in emerging economies. Although there is limited research in this area (Hoskisson et al. 2000; Kakani 2000), the few studies that have been done provide conflicting results. For example, Chang and Hong (2000) found that diversification has a positive influence on firm performance; Kakani (2000) predicts an inverse relationship; while Saple (2000) predict no relationship between diversification and firm performance.

 

Diversification and Systematic Risk, Unsystematic Risk: -

Recent studies of diversification much focused on the relationship between diversification, systematic risk, unsystematic risk and returns; however is ambiguous. Montgomery and Singh, 1984 were the first strategy researcher had studied this relationship on the basis of the review of finance literature and found that unrelated diversifiers show higher than average levels of systematic risk because of high debt levels, low market power and low capital intensity. By using one way analysis they confirmed that the unrelated diversifiers have the higher systematic risk than other types of firms. But they did not determine any significantly correlation between diversification strategy and systematic risk; when high debt levels, low market power and low capital intensity were controlled. Unrelated diversifiers show higher levels of systematic risk than related diversifiers (Lubatkin and O’Neill, 1987; Barton, 1988). In contrary, Amit and Livnat, (1988); studied the relationship of diversification and risk–return trade-off and argued that the related diversification characterizes high return- high risk firms and that such a strategy also yields great market risks and market-to-book values. Low return-low risk firms are usually unrelated diversifiers, with relatively lower market risks and lower market-to-book ratios.

 

The modern financial theories suggest that the systematic risk cannot be diversified away it is the risk which effect all the market and companies in it. And in case of unsystematic risk it cannot be applied it depends upon managerial actions and risk profiles of combing business.  Various Studies have been done to explore the diversification. Diversification strategy and the relation of capital structure, source of finance, profitability, risk has been studied by various authors. Studies from 1950’s to 2016 on diversification never come to one conclusion.

 

 

Table 1  Summary of Predicted Influence on Risk

(a. Unsystematic Risk)
Acquisitions Strategies	Influences
	Portfolio Effect	Positive Intervention	Administrative Pitfalls	Net Effect
Single-business merger	No Change	Large Decline	Large increase	No Change
Vertical mergers	Small Decline	Small Decline	Increase	No Change
Related mergers	Decline	Decline	Increase	Small Decline
Unrelated mergers	Large Decline	No change	Small Increase	Small Decline

 

 

 

Various models by authors interpreted that there is no universal theory. With time the results of studies on diversification changed. This has been observed that number of such study done in India is very less in recent years. Therefore, it is expedient that there is a study is much required on Indian companies to find the relation between Diversification strategy and Financial Strategy. Source- Micheal Lubatkin and Hugh M O’Neill 1988.

 

OBJECTIVES:

The study aims to find what factors effect diversification and the relationship between them. The objectives of study are-

“Extent of Diversification” and “Financial Strategy”

·       To study the relationship if any between overall “Firm Risk” and “Extent of Diversification” of selected Indian firms.

·       To Study the relationship between “Leverage” and “Extent of Diversification”

·       To Study the relationship between “Size” and “Extent of Diversification”

“Diversification Strategy” and “Financial Strategy”

·       To study the relationship if any between overall “Firm Risk” and “Diversification Strategy” of selected Indian firms.

·       To Study the relationship between “Leverage” and “Diversification Strategy”

·       To Study the relationship between “Size” and “Diversification Strategy”

 

RESEARCH METHODOLOGY:

A.    MEASURES OF VARIABLES:

1.     Extent of Diversification (DIVER):

It is a risk-management technique that mixes a wide variety of investments within a portfolio in order to minimize the impact that any one security will have on the overall performance of the portfolio. Montgomery and Singh (1984) indicated that diversified cash flows of diversified firms are likely to reduce the bankruptcy risk of a firm, and increased firm size will tend to provide better access to the capital markets and cost savings when securing debt finance. These true capital cost economies are likely to lead to increased debt positions in highly diversified firms. To measure diversification, we have taken nominal scale (CS) to indicate 1 for all firms which are non-diversified, 2 for all firms which are less diversified and 3 for all highly-diversified firms.

 

2.     Financial Strategies:

Financial strategy of the firm is defined as the financial manager has plans to finance its overall operations to meet its objectives now and in the future. Firm’s risk, leverage and firm’s size covers under the financial strategies in this paper.

 

a)     Firm’s Risk: -

The financial uncertainty faced by an investor who holds securities in a specific firm. Firm risk can be mitigated through diversification; by purchasing securities in additional companies and uncorrelated assets, investors can limit a portfolio's exposure to the ups and downs of a single company's performance. It includes the bankruptcy risk, systematic risk and unsystematic risk.

 

1. 

a.1- Bankruptcy Risk (BR):

The bankruptcy risk is the company’s incapacity to face the due obligations resulting either from current operations, whose accomplishment conditions the continuity of the activity, or from obligatory samplings. The bankruptcy risk can also be defined as the impossibility of the companies to face a financial banking transaction, respectively its incapacity to repay in time the borrowed amounts in the conditions established in agreement with third parties, in accordance with a loan agreement. In this study, Bankruptcy was calculated by Altman’s Z-Score test.

 

Altman Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Whereas -

A = working capital / total asset

B = retained earnings / total assets             

C = earnings before interest and tax / total assets

D = market value of equity / total liabilities              

E = sales / total assets

 

Zones of Discrimination: Z > 2.6                 “Safe” 1.1 < Z < 2.6     “Grey” Z < 1.1     “Distress” (Reference Kiran Kumar K V.2015)

 

1) 

a) 

a.2- Systematic Risk (SR):

Systematic risk refers to the hazard which is associated with the market or market segment as a whole. It is uncontrollable affected by a large number of external factors and generally affects securities in the market. It includes Interest rate risk and Market risk. The firm’s systematic risk or the sensitivity (coverability) of a firm's returns to the aggregate returns of the marketplace, determines its cost of capital. Sources of systematic risk include monetary and fiscal policies, cost of energy, and demographics of the marketplace. If all other things are the same, the lower the systematic risk, the lower the required rate of return on an investment, and the greater the number of investment opportunities; hence, the higher the value of the firm (Van Horne, 1980: 68). In this study, we are using the beta value of the firm as a measure for Systematic Risk.

 

a.3- Unsystematic Risk (USR):

Unsystematic risk refers to the risk associated with a particular security, company or industry. It is controllable and is affected by a large number of internal factors and generally affects only a particular company. It includes: Business risk and financial risk. In this study, we are using the VAR value of the firm as a measure for Unsystematic Risk.

 

b)     Leverage (LEV):

Various measures of capital structure have been considered in the literature, however most studies use a measure of leverage; that is a measure of the indebtedness of firms. There is no consensus on what measure of leverage should be used. In the following previous studies such as Rajan and Zingales (1995), Booth et al. (2001) and Ashenafi (2005); we considered one measure of leverage which is Debt to Equity Ratio. Debt to Equity is computed as total Liabilities divided by total assets minus total liabilities.

 

 

c)     Firm Size (FS):

Size is one of the most widely accepted determinants in research of financial strategies. It is the measure of how large the firm’s operational capacity is. Researchers who focus on bankruptcy cost (static trade-off theory), they justify the positive relationship between size and financial leverage like this: as large firms are more diversified, have low transaction costs for issuing new equity, and probability of bankruptcy for large firms is less than smaller firms therefore size positively relate to leverage. Furthermore, in the research made by Rajan and Zingales (1995), indicate that including size in their cross sectional analysis, they found that the effect of size on equilibrium leverage is more ambiguous. Thus, larger firms tend to be more diversified and because of that, size may then be inversely related to the probability of bankruptcy. Various studies have used a number of measures to capture the size of firms. Titman and Wessels (1988) and Benito (2003) use the log of total assets to measure size. Similarly, this study also finds that the log of total assets to be an appropriate measure of size.

 

3. Diversification Strategies (DS):

A diversification strategy should focus on identifying new activities that require resources that a firm already possesses but that are currently underleveraged. In Previous studies, Scholars has suggested the two modes of diversification strategies i.e., diversification via acquisitions versus through direct entry. The key difference between the two modes is in the amount of information available to the suppliers of funds. In acquisitive entries, both the target and the acquiring firm already exist, each with its own history. The suppliers of funds are able to examine the risk and asset value of the target firm, and estimate the change, if any, under the management of the acquiring firm, based on its historical actions. Direct entries require a longer time to achieve profitability, making risk estimation extremely difficult. It is also difficult to assess the ability of management to operate this new business, especially because there are no existing assets or historical record. The high information asymmetry makes it difficult to accurately estimate project risk. To measure diversification strategies, we have taken nominal scale (CS) to indicate 0 for all firms which are opt for direct entry strategy and 1 for all firms which are acquisitive entry strategy, as diversification strategies.

 

B.    MODEL SPECIFICATION:

This research presents an empirical analysis of extent of diversification, diversification strategies and financial strategies of top 30 diversified firms in India with most recent available data. A one way ANOVA was used to analyse the data collected from the financial statements of these top 30 diversified firms in India.

Model - 1

 

Model - 2

 

Where:    β0 = Coefficient of Intercept (Constant)

β1 = Coefficient of Leverage

β2 = Coefficient of Firm Size

β3 = Coefficient of Bankruptcy Risk

β4 = Coefficient of Systematic Risk

β5 = Coefficient of Unsystematic Risk

ε = the Error Term

 

MODEL SPECIFICATION

                                         MODEL -1                                                                                                      MODEL -2

 

 

C.    SAMPLE DESCRIPTION:

The Sample of study comprises the data of top 30 companies according to market capitalization listed in Bombay Stock Exchange (BSE). Because the SENSEX has wide representation and also the high capital value companies are listed in it. These companies are from different sector. The financial data was extracted from annual report of companies for year 2015-16. The wise breakup of companies is given in below table.

 To divide the companies on level of diversification we have taken the NIC (National Industrial Classification) code of Products of companies. The National Industrial Classification (NIC) is an essential Statistical Standard for developing and maintaining comparable data base according to economic activities. Such classifications are frequently used in classifying the economically active population, statistics of industrial production and distribution, the different fields of labour statistics and other economic data such as national income. Comparability of statistics available from various sources, on different aspects of the economy, and usability of such data for economic analysis, are prerequisite for standardization of a system of classification. (Source- www.udyogadhaar.gov.in).

Table 2: The sector wise breakups of companies

S. No.	Industry	No of Companies	As % of Total Sample
1	Automotive	6	20%
2	Banks	4	13%
3	FMCG	2	7%
4	IT	2	7%
5	Oil Industry	2	7%
6	Others
	a) Mining and Minerals	1	3%
	b)  Paints and Varnishes	1	3%
	c) Steel	1	3%
	d) Telecom Industry	1	3%
	e) Textile	1	3%
	f) Transportation	1	3%
7	Pharmaceutical	4	13%
8	Power Generation and distribution	4	13%
Total Companies		30	100

 

Table 3: Extent Of Diversification In Sample Companies                               Table 4: Diversification Strategies

Diversification	No. Of Companies
Non- Diversified	13
Moderate Diversified	8
Highly Diversified	9

Diversification Strategy	No. Of Companies
Acquisitions	26
Direct Entry	4

  

Fig 1: Pie chart showing the Extent of Diversification                               Fig 2: Pie chart showing the Diversification Strategies

 

 

For companies who have more than 4 different codes they are considered to be highly diversified. These NIC code were taken from www.udyogadhaar.gov.in which classified these codes last in 2008. The no. of companies according to diversification strategy are as under-

 

“And for the level of diversification we have taken the NIC (National Industrial Classification) code of Products of companies. In which if companies product NIC code start with same 2 digits industry group it is considered Non-Diversified. If the NIC code is different than considered to be Diversified. These NIC code were taken from www.udyogadhaar.gov.in which classified these codes last in 2008. The no. of companies according to diversification strategy is given in table 3and table 4In sample data 44% companies are Non-Diversified, 26 % companies are moderate diversified and 27% are highly diversified. Also the company has to decide its diversification mode. Up to what extent firm relies on its resources or it adopts acquisitions. The companies diversify their business into different sectors (either by Acquisitions or direct entry) the data was taken from Annual report or Company’s website. 

 

 

RESULTS AND DISCUSSION:

This present study is conducted to find relationship of the extent of diversification and diversification strategies (mode of entry) with their financial strategies of firm. For this purpose, we performed the normality test on following data and the descriptive statistics is given in below table:

 

 

Table 5: Descriptive Statistics

	Mean	Max	Min	Std. Dev.	Skewness	Kurtosis	JarqueBera	Probability	Observa tions
Leverage	2.32	14.66	0.23	3.45	2.13	6.95	42.14	0.00	30.00
Firm Size	11.20	14.63	9.03	1.46	0.48	2.37	1.67	0.43	30.00
Bankruptcy risk (Altman's Z)	2.22	8.27	-0.39	2.13	0.93	3.36	4.46	0.11	30.00
Systematic Risk	0.91	1.83	0.10	0.37	0.26	2.97	0.34	0.84	30.00
Unsystematic Risk	8.15	12.29	7.50	1.33	2.08	6.06	33.38	0.00	30.00
SOURCE: SPSS results of descriptive statistics

 

Bankruptcy Risk (Altman’s Z score) means the possibility that a company will be unable to meet its debt obligations. Firm below 1.8 means that firm is headed for bankruptcy. And above 3 means it is not likely to go bankrupt. The mean sample of study is 2.22 means it is very near to low score and alarming condition. Systematic risk or undiversifiable risk means that the risk inherent to entire market. The risk which cannot be diversified. The mean of Sample is 0.91 which concludes that the Sample have high risk. Also, the mean of Unsystematic Risk is very high. The Range of data for systematic risk and Bankruptcy is high. Minimum Systematic Risk is 0.10 and Maximum is 1.8. Whereas Altman’s Z score move between 0.39 to 8.27. It shows that Spectrum of data is very high. And our data has good representation of universe.

 

Table 6: Multicollinearity among independent variables

 

 

 

Fig 3: Bar graph showing the mean and  range of the variables

 

The comparison between Non-Diversified and Diversified firms on variable of study is observed that diversified are at more risk level. The mean of bankruptcy risk for diversified firm is lower than that of Non-Diversified (Lower is riskier). And for systematic and unsystematic risk is higher for the diversified firms.

Table 8 shows the results of ANOVA test applied on 3 categories of diversification variable which used in this study and only Bankruptcy risk is significant. Other variables do not show any significance. Therefore, companies were regrouped in two categories of diversification (Diversified and Non- Diversified); results that there is significant relationship between Diversification and Bankruptcy risk, Unsystematic risk. As the significance value of Bankruptcy is 0.034 its acceptance level is high. And significance value 0.095 it is less reliable and has less level of acceptance.

 

 

Table 7: Comparison of  Means

		Bankruptcy risk (Altman's Z)	Leverage	Firm Size	Systematic Risk	Unsystematic Risk
Non-Diversified	Mean (N=13)	3.15	2.11	10.98	0.80	7.69
	Std. Deviation	2.55	4.25	1.58	0.34	0.42
Diversified	Mean (N=17)	1.51	2.48	11.37	1.00	8.50
	Std. Deviation	1.44	2.83	1.38	0.38	1.66
Total	Mean (N=30)	2.22	2.32	11.20	0.91	8.15
	Std. Deviation	2.13	3.45	1.46	0.37	1.33

 

 

 

 

 

 

 

 

 

 

Table 8: ANOVA

	Diversification considered in Three Categories			Diversification considered in Two Categories
	Mean Square	F	Sig.	Mean Square	F	Sig.
Leverage	13.168	1.115	0.343	1.008	0.082	0.777
Firm Size	2.236	1.058	0.361	1.117	0.518	0.478
Bankruptcy risk (Altman's Z)	11.070	2.742	0.082**	19.721	4.956	0.034*
Systematic Risk	0.136	1.009	0.378	0.273	2.090	0.159
Unsystematic Risk	3.796	2.362	0.113	4.905	2.981	0.095**
SOURCE: SPSS results of ANOVA

 

 

Table 9 represents the comparison of Diversified and Non-Diversified Companies w.r.t. Bankruptcy Risk and Unsystematic Risk and it is observed that Non-Diversified companies have mean of 3.15 means they are less likely to go bankrupt. Whereas Diversified companies have mean score of 1.51 means they are at higher risk to go bankrupt and the mean of Non-Diversified 7.69 and Diversified companies mean is 8.50. Table 10 represents the results of ANOVA for Mode of Entry i.e. Diversification Strategy in three views such as overall aspects, non-diversified and diversified companies. It can be concluded that there is no significant relationship between mode of entry and other variables. But there is significance value of systematic risk was higher for the Non-diversified companies (0.90) in comparison with Diversified companies (0.44).

 

Table 9: Comparison of Diversified and Non-Diversified Companies w.r.t. Bankruptcy Risk and Unsystematic Risk

                                                                                                                    

         Fig 4: Bar graph showing the Comparison of Diversified and                       Fig 5: Bar graph showing the Comparison of Diversified and

Non-Diversified Companies w.r.t. Bankruptcy Risk                                      Non-Diversified Companies w.r.t. Unsystematic Risk

 

Table 10: ANOVA – Mode of Entry (Diversification Strategies)

	Overall			Non Diversified			Diversified
	Mean Square	F	Sig.	Mean Square	F	Sig.	Mean Square	F	Sig.
Leverage	6.000	0.495	0.487	3.37	0.17	0.69	3.81	0.46	0.51
Firm Size	0.491	0.225	0.639	1.16	0.44	0.52	0.13	0.06	0.81
Bankruptcy risk (Altman's Z)	0.586	0.126	0.726	8.49	1.34	0.27	0.01	0.01	0.94
Systematic Risk	0.025	0.180	0.675	0.00	0.02	0.90	0.09	0.64	0.44
Unsystematic Risk	1.522	0.862	0.361	0.04	0.20	0.66	2.97	1.09	0.31
SOURCE: SPSS results of ANOVA

 

 

CONCLUSIONS AND RECOMMENDATIONS:

The current study was undertaken to find the relationship between the diversification strategy and financial strategy. It has been found that when the diversification was divided into three categories only bankruptcy risk was significant. And when the diversification was divided into two category bankruptcy risk Unsystematic risk was significant. It means that Diversified firms have high level of risk. There is no significant relationship between diversification strategy and Leverage, Firm size, Bankruptcy risk, Systematic Risk and Unsystematic risk. Also, it is found that the systematic and unsystematic risk is higher for the diversified firms.

 

It is suggested that the companies whose primary objective is to reduce risk should avoid diversification. Micheal Lubatkin and Hugh M O’Neill (1987) studied diversification and concluded that it is expected in case of stock diversification that the risk increases in diversification supported by various discussed studies. But in case of portfolio diversification the risk decreases with diversification. When the stockholders diversify the, the expected variance of the combined result is linear extension of past variance minus covariance between two income streams. This relationship between unsystematic risk and diversification is known as portfolio effect. But when the corporations diversify, variance need not be linear of historical variance. Diversification will not reduce systematic risk.

 

RECOMMENDATIONS:

To diversify the companies should select industry carefully considering the risk associated with it. Companies should consider the unsystematic risk with industry they are diversifying. Indian firms are in inorganic growth phase to diversify they can opt any type of diversification strategy.  As the results of study suggested mode of entry has no effect of financial strategies. The risk for firm will not be change due to particular mode of entry.

 

Companies before diversifying should be careful about the increase in working capital, total assets and liabilities. And decrease in earnings before interest and tax and retained earnings. Because this will affect the financial ratios of firm and leads to increase in risk. Companies should keep watch on its financial position for better performance and less risk.     

 

LIMITATION AND SCOPE FOR FURTHER STUDY:

The research only explored the data of 30 companies listed in BSE. Sample Size of study was small and more no of companies can be included. Also, there is only 2-3 companies from few industries which is very less to represent the economy. There are no companies from few sectors.  To find the relationship between variables the data of only 1 year (2015-16) was taken for study. The period is too short and therefore results can be biased.  There are only 5 variables taken in current study. More numbers of variables can be studied for future studies. The diversification of firm can also be by taking related and unrelated diversification.

 

SCOPE FOR FURTHER STUDY:

The current study was done with only 30 companies listed in Bombay Stock Exchange (BSE). There is scope of further study with more number of companies. Which can represent the maximum number of industries? The company from each industry can be part of sample data. More research can be done taking new variables like profitability, growth opportunity, return on assets, firm performance and ownership concentration. The time period of study can be increased which was 1 year in current study. The relationship of mode of entry with profitability, diversification and ownership can be studied in future. Many authors studied the diversification into related and unrelated business and the various variables. For the future studies on Indian firms this can also be taken into consideration for better results.

 

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Accepted on 31.03.2017          © A&V Publications all right reserved