The Dark Side of Firm Diversity: An Empirical Examination of the Impact of Firm Diversity on Resource Allocation Efficiency in Multidivisional Firms

There is a renewed debate about whether multidivisional firms allocate resources efficiently across their divisions. This paper contributes to the literature on this debate by developing and testing a conceptual framework that links resource allocation efficiency to three forms of firm-level diversity: diversity in industry-specific knowledge, diversity in industryspecific investment opportunities, and diversity in operations. Regression analysis of a large sample of multidivisional firms shows that resource allocation efficiency tends to decrease as diversity in either industry-specific knowledge or industry-specific investment opportunities increases. Moreover, it appears that the negative relationship between the diversity in industry-specific investment opportunities and allocation efficiency weakens and may even turn positive when the diversity in industry-specific knowledge is low. On the other hand, the diversity in operations does not appear to affect allocation efficiency. These results are robust to the potential bias due to sample selection. Combined with related theory, the results suggest that firm diversity could have either a detrimental or a positive effect on a firm’s performance.