Diversification and Competitive Advantage: A Risk-Based Explanation

This study emphasizes the importance of risk when analyzing the link between corporate diversification and competitive advantage. Our research builds on the notion that diversification yields a risk advantage and subsequently a financing advantage during crisis. As financing is constrained during crisis, this financing advantage allows diversified firms to make beneficial, counter-cyclical investments when others cannot and thus create a competitive advantage during crisis. We believe that managers are less inclined to invest as counter-cyclical investments are risky. Hence, we suggest that good corporate governance positively moderates this relationship. Using the financial crisis 2008–09 as a natural experiment and testing different investment types, we find broad empirical support for our hypotheses. Our work underlines the opportunity value inherent to external shocks from which diversified firms can benefit.