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Sample Essay on Models Used by Companies to Leverage Diversification

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Sample Essay on Models Used by Companies to Leverage Diversification

Ajay, R., & Madhumathi, R. (2012). Diversification strategy and its influence on the capital structure decisions of manufacturing firms in India. International Journal of Social Science and Humanity2(5), 421.

This research’s primary focus is on the Indian corporate sector over the past two decades. The study encompasses establishing some of the tools used by companies, both local and international, to achieve the objective of financial liberalization. The theoretical perspective of this research on which this study is based on is the impacts of diversification strategies on the decisions made by companies regarding leverage, as well as how these strategies impact the capital structure of companies. In addition, the study is founded based on data sampled from multiple manufacturing firms in India, which are then subjected to statistical analysis. Its appropriateness to the intended audience is evident in the fact that it provides information that international companies are often more leveraged as compared to the local companies with the focus on India. One of the authors, Ranjitha Ajay, is a doctoral student at Indian Institute of Technology, and therefore, she has the sufficient information about Indian firms. The limitation of this research is that it is was biased, especially in the selection of samples, as the focus is was only on manufacturing companies. This research is significant as it reveals that geographic diversification positively impacts leverage, and that product diversification has no impact on the leverage of firms.

Christiningrum, M. F. (2015). Effect of Diversification Strategy, Leverage and IOS on Multi-Segment Corporate Performance in Indonesia. Mediterranean Journal of Social Sciences6(5 S5), 157.

The diversification of strategies and their impacts on firms are explored by Christiningrum. The author also explores how the performance of firms is measured using the proxy market performance strategy among others. Also, included in this study is the measurement of diversification using the Herfindahl index. The study’s results indicate a negative impact of the implementation of the diversification strategy on the performance of firms. Consequently, the study’s findings show that there is a relationship between the diversification and the performance of firms.

Some of the theories used in this study to explain diversification and its connection to leverage are the resource-based theory, market power theory, and agency theory. The research study has drawn samples from companies that are listed on the Indonesia Stock Exchange. The samples have been taken from all companies but the ones in the financial sector due to lack of sufficient data.   The study employed samples of firms listed on the Indonesia Stock Exchange; with samples were being taken from all companies in every industry leaving out the financial industry and others that lacked the data of at least five companies specialized by the industry sector. This study’s intended audience is companies that look forward to using the diversification strategy, and therefore, its appropriateness to this audience is evident in the fact that it gives insight into the effect of diversification strategy on corporate performance. The author, M. F. Christiningrum, is an expert in dealing with organizational studies, business ethics, and business administration, which means that she has relevant experience and knowledge with regards to studying leverage diversification in companies. Christiningrum (2015) says that “one of the main limitations of the study is that it is based on narrow sampling as it does not include the entire industry, especially under the Jakarta Stock Industrial Classification.”  Failure to include the entire sector in grouping is among the limitations of the study, especially under the Jakarta Stock Industrial Classification (JASICA). Nonetheless, the significance of the study is that it has projected a firm’s performance resulting from strategy diversification.

Nicoli Junior, J., & Funchal, B. (2013). The effect of corporative diversification on the capital structure of Brazilian firms. Revista Contabilidade & Finanças24(62), 154-161.

This study gives insight into corporate diversification with a focus on how it influences firm borrowing capacity. Its theoretical perspective is based on the relationship between leverage and the degree of corporate diversification. The study argues that diversification is of significance, especially to firms, as they have the capability to finance other projects by transferring scarce capital to the projects. Also, with diversification, there is the imperfect correlation effect between the cash flows of the divisions or projects of firms, which then reduce the risk of default while increasing the firm’s collateral paving the way for greater access to credit.

This study adopted a panel data model with fixed double effects whose impact estimation was pointed out with a focus on unobservable and time-variant individual characteristics as well as the exposure of firms to common shocks over time. The research study used samples comprising more than 300 companies (resulting in around 560 observations) that were listed on Bovespa, between 2009 and 2011.   Similarly, it used an empirical cross-pledging test that was conducted using two groups of companies with the initial sample of the study made up of composed of 335 companies listed on Bovespa between the years 2009 and 2011 generating a total of 559 observations, whereas the second sample had a total of 24 companies that were surveyed between 2003 and 2011 comprising a total of 191 observations. This study is appropriate to the audience as it offers insight into how companies leverage diversification. A limitation of this study is that its sample was limited to the period between 2009 and 2011. The study is significant as it determines the relationship between the degree of diversification and leverage, which is crucial to organizations.

O’Brien, J. P., David, P., Yoshikawa, T., & Delios, A. (2014). How capital structure influences diversification performance: A transaction cost perspective. Strategic Management Journal35(7), 1013-1031.

This study’s focus is on understanding the effect or influence of capital structure on diversification performance using a transaction cost perspective. It is based on the perspective that debt should inhibit diversification while opposing the performance consequences of the same. O’Brien, David, Yokishawa, and Delios argue that “While the agency theory tends to predict that debt should result in higher performance for diversifying firms; transaction cost economics (TCE) is are a likely indication that an increase or rise in debt causes lower firm performance, especially for firms that look forward to expanding into unfamiliar markets.”

This research uses agency theory to demonstrate the effects of leverage on diversification. The theory also highlights the relationship between diversification and capital structure. It states that while debt financing has numerous benefits for firms due to the fact that it helps shield or protect some income from taxes. It as well lowers a firm’s overall cost of capital. Moreover, it poses numerous risks in that the failure to make periodic interest and loan payments is likely to lead to financial distress and bankruptcy. The study employs the foreign investments models and empirical tests on a large sample of firms in Japan. The research is appropriate to its intended audience in its establishment that firms achieve higher returns when they leverage their resources and competences into new markets, especially at the time when managers are protected from the rigidities of market governance on perspectives such as debt and principally bond debt. The authors, O’Brien, David, Yokishawa, and Delios, are experts from the in Lally School of Management, Kogod School of Business, Lee Kong Chian School of Business, and Business School at the National University of Singapore respectively. One of the limitations of this research is that its sample was limited to the years 1991-2001 because the sources used to construct the diversification measures changed the manner in which they report segment information in the early 2000s. Another limitation of the study is that endogeneity was evident. This study is significant as it determines whether a firm is likely to benefit from leveraging its resources and capabilities into new markets.

 

 

References

Ajay, R., & Madhumathi, R. (2012). Diversification strategy and its influence on the capital structure decisions of manufacturing firms in India. International Journal of Social Science and Humanity2(5), 421.

Christiningrum, M. F. (2015). Effect of Diversification Strategy, Leverage and IOS on Multi-Segment Corporate Performance in Indonesia. Mediterranean Journal of Social Sciences6(5 S5), 157.

Nicoli Junior, J., & Funchal, B. (2013). The effect of corporative diversification on the capital structure of Brazilian firms. Revista Contabilidade & Finanças24(62), 154-161.

O’Brien, J. P., David, P., Yoshikawa, T., & Delios, A. (2014). How capital structure influences diversification performance: A transaction cost perspective. Strategic Management Journal35(7), 1013-1031.

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