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Nonlinear Effect between Diversification and Corporate Performance from the Perspective of TMT Faultlines: A Panel Smooth Transition Model

DOI: 10.4236/ajibm.2018.81012, PP. 174-192

Keywords: Task-Related Faultlines, Bio-Demographic Faultlines, Diversification, Corporate Performance, Panel Smooth Transition Model

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Abstract:

The results of existing researches of the relationship of diversification-performance are unstable and contradictory. Hence, according to the theory of TMT faultlines, this empirical study utilizes a panel smooth transition (PSTR) model to investigate whether the relationship of diversification-performance will have a nonlinear transition due to TMT faultlines. Evidence from a sample of 95 publicly traded companies in China from 2006-2015 shows a nonlinear effect under the influence of task-related faultlines and bio-demographic faultlines. Specifically, when transition variable is task-related faultlines, the threshold divides the PSTR model into two regimes with the values of 0.2262. The effect on the relationship transforms from insignificant negative correlation to positive correlation as the model transforms from low regime to high regime. When it comes to bio-demographic faultlines, the threshold divides it into three regimes with the values of 0.1602 and 0.7146. The effect becomes negative in the crowding-out regimes but turns to a positive correlation in the middle regime. Therefore, the main contribution of this study is that it not only offers a new way of thinking for answering the arguments of the relationship, but also provides a basis for decision making when choosing the senior management team for the implementation of diversification strategy.

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