Narrow Results

The main purpose of this paper is to investigate empirically whether corporate diversification reduces the risk of the diversifying firm. We investigate this issue using a sample of diversifying acquisitions and various risk measures. We find that corporate diversification tends to decrease the risk of some firms but increase the risk of many others. On average corporate diversification does not lower firm risk. These findings call into question the notion that corporate diversification strictly reduces firm risk.

The greater the firm-specific risk, the more valuable are the innovative opportunities underlying the growth options, and the greater the innovation rent. We examine whether firm-specific risk drives the firm’s innovation rent. We find that the firm-specific risk positively moderates the association between firm innovativeness and firm surplus. Innovation rent is the change in firm surplus per unit change in the knowledge capital (accumulated R&D stock). The firm surplus is the excess market value of the firm over shareholder expectations. We further examine whether the growth options embedded in the firm’s assets mediate the association between firm innovativeness and firm surplus. Growth options positively mediate the association between knowledge capital and firm surplus. The firm-specific risk enhances the value of innovative opportunities underlying the firm’s growth options that are exercised such that the firm earns a value surplus. Our results are consistent with the strategic rent model and emerging behavioural theory.