Corporate diversification and key determinants?

Corporate diversification is a strategy that enables corporations to expand their core business into other businesses. In Malaysia, corporate diversification continues to represent a fundamental organisational structure. Some two-thirds of Malaysian firms are diversified. However, when compared to developed countries such as the U.S. and the UK we find that firms are moving towards non-diversification. The study is based on the population framework consisting of all of the public limited companies (PLCs) listed on the Bursa Malaysia stock exchange from 2007 to 2012. A dynamic panel model system generalized method of moments (GMM) was used to analyse the corporate diversification and key determinants. The research provides answers to close the literature gaps, by using entropy and relatedness, which reflected the actual degree of diversification better than those studies that used conventional dummy variable methods and were unable to explain the degree of the diversification and key determinants. The empirical findings demonstrated that diversification is better than non-diversification firms for the curvilinear relationship between diversification and firm performance (ROA and Tobin's Q) when using entropy index and relatedness is taken into consideration. The research further concluded that the relationship of free cash flow (FCF) and growth opportunities has a similar positive effect toward corporate diversification.