Diversification's effect and manager experience on investment efficiency

Hsiao-Fen Hsiao, Jinguan Tang*, Conghua Wen

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

This paper discusses whether diversification is the optimal business strategy for a firm and whether diversification leads to efficient fund allocation. The analysis reveals that bad divisions in diversified firms exhibits over-investment with higher investment levels than ineffective specialized firms. Meanwhile, good divisions of diversified firms shows lower investment levels than effective specialized firms.

This paper further analyzes three types of managers according to their time preferences, namely time-consistent exponential, less-experienced, and sophisticated managers. Their views on diversification and its effect on the investment efficiency are studied.
Original languageEnglish
Pages (from-to)890-900
Number of pages11
JournalEconomic Analysis and Policy
Volume81
DOIs
Publication statusPublished - Mar 2024

Keywords

  • Diversification
  • Fund allocation
  • Manager experience
  • Overinvestment
  • Underinvestment

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