Abstract:
Diversification refers to a process of distributing the wealth of an organization in optimal
portfolios that would guarantee optimal returns. Diversification is used to maintain firm
competitiveness so as to achieve value creation through economic of scope, financial
economies, or market power. By diversifying, managers form internal resource markets
where capital distribution is more proficient as a result of lower levels of disproportionate
information.
This study sought to find out the effects of corporate diversification on financial
performance among selected companies listed in the Colombo Stock Exchange. This study
sought to find out the effects of corporate diversification on financial performance among
selected companies listed in Colombo Stock Exchange. The main variables that were used
to measure the financial performance were related products diversification from the core
products, unrelated product diversification and international diversification. The sample
was selected by using a non-probability sampling called judgmental sampling method
using secondary data for the period 2014 to 2018. In order to achieve the research
objective, multiple regression model was applied to identify the impact of corporate
diversification. Firm financial performance was measured based on the Return on Assets
(ROA) and diversification was measured by the using Specialization Ratio(SR). For the
data analysis purpose STATA software and Excel was used'
The findings show diversification strategies had a positive impact on firm financial
performance and also Related Product Diversification had a significant positive
relationship between financial performance, International Diversification had a negative
relationship and Unrelated Product Diversification had a positive relationship between
financial performance. Diversification increases market share and growth prospects of
companies. This study therefore recommends that companies adopt diversification
strategies to diversify their risk exposures'