Journal of Financial and Quantitative Analysis

Research Articles

Inefficient Labor or Inefficient Capital? Corporate Diversification and Productivity around the World

Todd Mittona1

a1 Marriott School of Management, Brigham Young University, 684 TNRB, Provo, UT 84602. todd.mitton@byu.edu

Abstract

I study the relation between corporate diversification and labor productivity in a sample of over 500,000 firms from 46 countries. Across the entire sample, greater diversification is associated with significantly lower labor productivity. The negative relation between diversification and labor productivity is not stronger in countries with more burdensome employment regulation, but it is significantly stronger in countries with better financial development. In addition, the negative relation is stronger in industries with high capital/labor ratios. Overall, the results suggest that the lower productivity in diversified firms is due more to the misallocation of capital than to the inefficient use of labor.

(Online publication December 01 2011)

Footnotes

I acknowledge the helpful comments of Daron Acemoglu, Joel Houston (the referee), Simon Johnson, and Paul Malatesta (the editor).

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