Diversification, Systematic Risk, and Shareholder Return: A Capital Market Extension of Rumelt's 1974 Study

Abstract

This study reexamined the performance outcome of diversification strategies by combining the advantages of security-market-based measures and Rumelt's classification scheme. The findings underscore the popular, though weakly supported, belief that controlled diversity is associated with the highest performance. Specifically, firms that diversified in a constrained manner demonstrated significantly lower levels of systematic risk and significantly higher levels of shareholder returns than firms employing other strategies.