Reassessing the Financial Implications of Corporate Diversification: Evidence from Iran

Abstract

This study examines whether corporate diversification strategy influences capital structure decisions in publicly listed holding companies. Using a balanced panel dataset of 36 holding companies listed on the Tehran Stock Exchange over the period 2011–2015, the analysis investigates the relationship between diversification strategy and firms’ reliance on debt and equity financing. Corporate diversification is measured using the Herfindahl index based on segment-level investment data, while capital structure is proxied by the debt-to-assets and equity-to-assets ratios. Firm size is included as a control variable. Panel regression models are estimated using random-effects specifications, selected through Chow and Hausman tests. The results indicate that diversification strategy does not have a statistically significant effect on either debt financing or equity financing. In contrast, firm size exhibits a significant association with capital structure, suggesting that scale-related factors play a more prominent role in financing decisions than strategic diversification. The findings challenge the common assumption that diversification enhances financial flexibility or increases debt capacity and highlight the context-dependent nature of the diversification–capital structure relationship. In the institutional setting of an emerging market, diversification alone does not appear to alter firms’ financing behavior. These results provide implications for managers and policymakers by emphasizing that diversification should not be pursued solely as a mechanism for optimizing capital structure.