Diversification across the life cycle of the firm: evidence from the IPO classes of 1998 and 1999

This paper uses business segment revenue data to examine the determinants of firm diversification over firm life cycles and whether diversification affects the survival of the firm. I analyze the life cycles and diversification choices of 727 firms that had their initial public offerings in 1998 and 1999 for twenty-one years. The results of this paper provide evidence of the life cycle theory of diversification in that firms are more likely to be diversified in the Mature life cycle stage and less likely to be diversified in the Introduction stage, regardless of the firm’s age. The paper’s results also support the agency theory of diversification, as diversifying firms are less likely to be acquired but not less likely to have a negative ending. A higher degree of diversification is related to a decreased likelihood of the firm being acquired. Firms that focus on creating growth opportunities with their diversification are less likely to be acquired than those that diversify by growing their existing business segments.