The Effect of Corporate Diversification on the Financial Performance of Quoted Firms in Nigeria

Abstract

Most firms utilize Corporate Diversification (CD) for survival, growth, increase market share, competitive advantage, and superior profitability. They expand via segments, ranges, subsidiaries, and income-generating sources to achieve this objective. However, environmental issues such as uncertainty and complexity create additional costs, systemic flaws, corporate governance challenges, and accountability and transparency issues that limit corporate diversification benefits. Hence, the effect of CD on the Financial Performance (FP) of Quoted Manufacturing Firms (QMFs) in Nigeria is investigated. The study was to determine the effect of subsidiaries diversification (SD), business segments diversification (BSD), products diversification (PD), and income diversification (ID) on the FP of QMFs in Nigeria. Ex-post facto and casual research designs were used. A sample of 48 QMFs selected from the population using multi-stage sampling techniques was utilized. Secondary data for 11 years (2011-2021) was analyzed with Structural Equation Modeling (SEM)’s factor analysis. The findings of the study were that SD and PD have a significant positive effect on FP of QMFs; BSD had a negative effect on ROA and ROE and a significant positive effect on ROCE; and ID has a significant negative effect on ROA, ROE, and ROCE of QMFs. This implies that CD through subsidiaries, product ranges, and income-generating sources have caused enormous positive and negative changes in the financial performance of QMFs in Nigeria. The study recommended that QMFs should expand subsidiaries, reduce unprofitable business segments, increase product ranges, and expand revenues streams to improve financial performance.