The Effect of Diversification Strategy on Firms Performance Using Entropy Measure

Firm managers seek a way to to improve their firm performance. One way is to use diversification strategy which creates range of business activities for the firms and leads to a better performance. This study examines the effect of diversification strategy on performance of 87 firms in Tehran Stock Exchange from 2010 to 2014. The main object of this study is to investigate the curvilinearity relationship between diversification strategy and profitability of firms by sorting it into its related and unrelated components. In this study we utilized multiple linear regression models to test the hypotheses. The statistical method is Panel Data. The results showed a curvilinear relationship between diversification and profitability of firms; that is to say profitability decreases at low levels of related diversification and increases at high levels of it; also profitability increases at low levels of unrelated diversification and decreases at high levels of it