Measuring Corporate Diversification: A New Perspective

Measurement of diversification has always remained one of the critical issues in earlier studies. During the past half-century or more, many measures of corporate diversification have been suggested (and applied) by a number of authors. These ranged from qualitative to quantitative measures and the latter can be further classified as categorical and continuous. Traditionally diversification as a continuous variable was measured through “Entropy” and “Herfindahl index”. But both measures fail to capture the degree of relatedness of group firms. To address this gap, a new measure is proposed based on correlation of firm’s sales which will not only capture the degree of relatedness of group firms but also be able to decompose as directly as entropy and Herfindahl index into additive elements would vary from zero to one.