Investigating the Relationship between Company Diversification and Systematic Risk by Studying the Cash flow of Companies Listed on the Tehran Stock Exchange

Subject Areas : Agriculture Marketing and Commercialization

Zahra Houshmand Negabi ¹ , Fatemeh Pirhayati ²

1 - Assistant Professor, Faculty Member at Islamic Azad University, Islamshahr Branch
2 - دانشگاه آزاد اسلامشهر

Received: 2024-05-27 Accepted : 2024-05-27 Published : 2024-12-07

Keywords: Corporate diversification, Cash flow, Systematic risk, Tehran Stock Exchange,

Abstract :

The main objective of this study is to investigate how cash flow and systematic risk can affect corporate diversification. When it comes to investment decisions and financial considerations in companies, diversification plays a crucial role. Studies indicated that corporate diversification influences employees’ productivity, cash retention, investment costs and overall company value. Diversification helps companies reduce risks when they encounter economic or market conditions. In other words, it assists companies in anticipating and preventing market changes and disruptions, thereby minimizing the impact of systematic risks. This research follows a descriptive and ex-post facto approach, categorized as cause and effect. The analysis of variables has been performed using multiple linear regression. Data from 118 companies between 2018 to 2022 were collected for research purposes. In order to analyze the data and test the hypotheses, Excel and EVIEWS software have been employed. The findings of this study indicate a relationship between systematic risk and corporate diversification. However, cash flow of companies and corporate diversification exhibited no significant correlation. Additionally, the results suggest that cash flow acts as a moderating variable that significantly influences the relationship between corporate diversification and systematic risk.

References:

1. Hajiha, Zohreh., Maqami, Fahimeh, (2016). Impact of corporate diversification strategy on debt costs in companies listed on the Tehran Stock Exchange. Journal of Audit Science, Vol. 14, No. 57.
2. Dehghan, Fatemeh, Pourheydari, Omid, Khedamipour, Ahmad. (2022). Impact of management forecast quality on investment efficiency considering the role of ownership structure. Financial Accounting and Auditing Research.
3. Rahimian, Nezam-al-din. (2019). Reflection on Financial Resource Procurement Methods in Economic Units. Hesabdar Journal, (146), 28-33.
4. Rezapour, Afshin, Adham, Abbas, & Aghaei Bejarkenari, Mohammad. (2015). Examining the Effect of Diversification on Systematic Risk and Performance of Companies Listed on the Tehran Stock Exchange. International Conference on Management, Economics, and Agricultural Sciences, Bandar Anzali.
5. Salemi, Masoud. (2015). Examining the Relationship between Debt, Diversification, and Profit Management in Companies Listed on the Tehran Stock Exchange. Accounting and Auditing Reviews, No. 25
6. Nikoumaram, Hashem, Hadian, Seyed Amin. (2015). "Explaining the Role of Debt and Diversification in Earning Management." Research in Accounting, Accounting Research: Winter 2013, Volume 5
7. Yahyazadefar, Mahmoud, Aliqoli, Mansooreh, Zabihy, Fatemeh. (2020). "Investigate the Relationship between Liquidity and Investment Efficiency with Respect to Financial Constraints and Operational Risk." Research in Accounting and Auditing
8. Bakke, T.-E., Gu, T., 2017. Diversification and cash dynamics. J. Financ. Econ. 123 (3), 580–601.
9. Berger, A.N., Di Patti, E., 2006. Capital structure and firm performance: a new approach to testing agency theory and an application to the banking industry. J. Bank. Finance 30, 1065–1102.
10. Campa, J.M., Kedia, S., 2002. Explaining the diversification discount. J. Financ. 57 (4), 1731–1762.
11. Gyan, A. K., Brahmana, R., & Bakri, A. K. (2017). Diversification strategy, efficiency, and firm performance: Insight from emerging market. Research in International Business and Finance, 42, 1103-1114.
12. Jensen, M., 1986. Agency costs of free cash-flow, corporate finance and takeovers. Am. Econ. Rev. 76, 323–339.
13. Jouida, S. (2018). Diversification, capital structure and profitability: A panel VAR approach. Research in International Business and Finance, 45, 243-256.
14. Kochhar, R., Hitt, M.A., 1998. Linking corporate strategy to capital structure: diversification strategy, type and source of financing. Strateg. Manage. J. 19, 601–610.
15. La Rocca, M., La Rocca, T., Gerace, D., Smark, C.J., 2009. Effect of diversification on capital structure. Account. Finance 49 (4), 799–826.
16. Laeven, L., Levine, R., 2007. Is there a diversification discount in financial conglomerates? J. Financ. Econ. 85 (2), 331–367 (August 2007).
17. Lamont, Owen A., Polk, Christopher, 2019. Does diversification destroy value? Evidence from the industry shocks. J. Financ. Econ. 63, 51–77.
18. Lang, Larry H.P., Stulz, Rene M., 2019. Tobin’s Q, Corporate Diversification and Firm Performance. Technical report, National Bureau of Economic Research.
19. Luo, Mi, 2019. A bright side of financial constraints in cash management. J. Corp. Finan. 17, 1430–1444.
20. Matsusaka, John G., Nanda, Vikram, 2020. Internal capital markets and corporate refocusing. J. Financ. Intermed. 11, 176–211.
21. Matvos, Gregor, Seru, Amit, 2018. Resource allocation within firms and financial market dislocation: evidence from diversified conglomerates. Rev. Financ. Stud. 27,1143–1189.
22. McLean, R. David, Zhao, Mengxin, 2014. The business cycle, investor sentiment, and costly external finance. J. Financ. 69, 1377–1409.
23. Monteforte, D., Staglianò, R., 2014. Firm complexity and capital structure: evidence from Italian diversified firms. Manage. Decis. Econ (01/2014).
24. Onali, E., & Mascia, D. V. (2022). Corporate diversification and stock risk: Evidence from a global shock. Journal of Corporate Finance, 72, 102150.
25. Park, K., Jang, S., 2013. Capital structure, free cash flow, diversification and firm performance: a holistic analysis. Int. J. Hospital. Manage. 33,51–63.
26. Rudolph, Christin, Schwetzler, Bernhard, 2013. Conglomerates on the rise again? A cross-regional study on the impact of the 2008–2009 financial crisis on the diversification discount. J. Corp. Finan. 22, 153–165