Author(s): Dwipraptono Agus Harjito, Utami Kurniawati Astuti, Reza Widhar Pahlevi, Jamaliah Said
Corporations apply diversification to enhance their overall strategic competitiveness, support value creation, gain market share, neutralise competitor strength, or expand the company's portfolio. Diversification can be categorised into related diversification and unrelated diversification. The study examines whether related and unrelated business diversification affects a company’s financial performance. Diversification is measured by the Herfindahl index while company performance is measured by using Return on Investment (ROI) and Tobin's Q. This research considers leverage, firm size, and company age as control variables. The sample includes 13 Indonesian manufacturing companies listed on the Indonesia Stock Exchange (BEI). The data for 5 years from 2013 to 2017 were analysed based on the panel ordinary least squares model (Panel OLS). Results found that overall business diversification does not affect the company's performance, but the relevant type of diversification has a significant impact on business performance. Moreover, financial leverage, company size, and age of the company have significantly positive effects on how well a business performs. The findings will help managers to understand the effective way of business diversification to increase financial performance of the company.