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Individual and Joint Performance Effects of Diversification, Geographic Scope and Organizational Leverage in Professional Service Firms: A Study of German Law Firms

Karna, Amit, Richter, Ansgar and Schommer, Monika (2014) Individual and Joint Performance Effects of Diversification, Geographic Scope and Organizational Leverage in Professional Service Firms: A Study of German Law Firms [Working Paper]

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Abstract

Extant theory and empirical evidence suggest that strategies of diversification and geographic scope expansion carry benefits as well as costs. However, it is unclear whether the arguments relating diversification and geographic scope expansion with firm performance are applicable in the specific context of professional service firms (PSFs). These firms are also characterized by particular organizational features, such as the importance of maintaining an optimal leverage ratio, defined as the ratio between junior professionals and senior ones as partners. Our hypothesis development suggests an inverted U-shaped relationship between service line diversification, geographic scope and leverage on the one hand, and PSF performance on the other. We empirically test these relationships using fixed-effects regression and polynomial response surface analysis (RSA) on panel data from 61 German law firms from 2003 to 2012. RSA provides a finely-grained understanding of the relationships among the variables of interest. We find an inverted U-shaped performance effect of diversification and leverage, but no relationship between geographic scope and performance. Moreover, we find evidence of a complementary relationship between diversification and leverage ratio. We conclude with a discussion of our findings and their implications for theory and practice.

Item Type: Working Paper
Divisions : Faculty of Arts and Social Sciences > Surrey Business School
Authors :
NameEmailORCID
Karna, AmitUNSPECIFIEDUNSPECIFIED
Richter, Ansgara.richter@surrey.ac.ukUNSPECIFIED
Schommer, MonikaUNSPECIFIEDUNSPECIFIED
Date : 31 January 2014
Identification Number : 10.2139/ssrn.2388294
Uncontrolled Keywords : Diversification; Leverage ratio; Geographic scope expansion; Professional service firms; Response surface analysis
Additional Information : EBS Business School Research Paper No. 14-10
Depositing User : Clive Harris
Date Deposited : 15 Dec 2017 11:04
Last Modified : 15 Dec 2017 11:06
URI: http://epubs.surrey.ac.uk/id/eprint/845293

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