Diversification strategies, financial leverage, and excess value: The role of information asymmetry and corporate governance

Research investigating the effect of diversification on (1) firm performance and (2) financial leverage has produced mixed results. Some studies found that diversification positively affects firm performance and increases the firm's debt capacity while some other studies found that diversification negatively affects firm performance and decreases the firm's debt capacity. In this study, I attempt to reconcile the paradox in prior research by introducing variables that influence the relationship between diversification and firm performance and between diversification and financial leverage. Specifically, I suggest that information asymmetry and corporate governance are two variables that were not considered by previous studies in examining the relationships between diversification and firm performance and between diversification and leverage but that these two variables influence these relationships.