A detail analysis on the relationship between Group’s diversification into the financial services industry and its impact on their financial performance

Abstract

Diversification has become a common strategy of corporate risk management along with availing other potential benefits. The intent of this study is to identify and analyze the relationship between diversification and its positive impact on financial performance of the Group. For this purpose we use the 12 years (1985 to 1996) data of Nishat Group of Companies, to test the relationship before and after diversification into financial services industry.  We find that the diversification into financial services industry proved to be more profitable for the Group, while the overall risk has been increased. Using independent variable in terms of profitability, operational efficiency and Growth we used EBITDA Margin, Total Assets Turnover and Growth, respectively, and for measurement of return we used Dependent Variables ROE & ROA, and the risk is measured with Coefficient of Variation, the results show that there is a strong relationship between dependent and independent variables and we reject Null Hypothesis that diversification does not have positive impact on financial performance of the Group. The other major finding of the research is that because of unrelated diversification the overall risk of the Group increased after diversification, whereas related diversification reduces risk.

Key Terms: Diversification, Financial Services, ROA, ROE, TATO, EBIDA