Empirical studies are yet to answer the basic question regarding why firms diversify and what affects this choice. The present study attempts to answer this question using data from British and German firms. The results show different effects of ownership concentration and financial variables on the decision to diversify. It is also observed that in the UK, diversification reduces firm performance, while in Germany, diversification improves firm performance.

While the consolidated, but still controversial, scientific debate about the relationship between diversification strategies and corporate value is predominant in literature (Martin and Sayrak, 2003; and Villalonga, 2003), one of the related stream of inquiry concerns the understanding of why firms diversify. Previous studies relating firm value (often measured by Tobin's Q) to diversification found it to be value-destroying giving rise to the term diversification discount (Lang and Stulz, 1994; Berger and Ofek, 1995; and Denis et al., 1997 and 2002). Nevertheless, the diversification discounts have been shown to lessen, disappear, or become premiums in recent financial literature considering alternative indicators other than the excess value methodology (Singh et al., 2007; Jiraporn et al., 2008; Marinelli, 2008; and Tong, 2010). The foundation of the existent controversial results concerns the source of the discount (or premium) caused by diversification decisions, that has to be better understood by analyzing the motivation to diversify. A first theoretical perspective, based on the effect of risk reduction and private benefits explanations, considers diversification as a decision taken for opportunistic reasons (Jensen and Meckling, 1976; Amihud and Lev, 1981; Jensen, 1986; Shleifer and Vishny, 1989; and Stulz, 1990). This explanation is consistent with a negative effect of diversification on firm performance. Many authors (Lang and Stulz, 1994; Berger and Ofek, 1995; Comment and Jarrell, 1995; Servaes, 1996; Denis et al., 1997; and Aggarwal and Samwick, 2003) have shown that firm value decreases with diversification due to this motivation. A second perspective concerns the advantages of corporate diversification. The financial synergies perspective predicts that diversification provides financial viability to firm's investment, avoiding transaction costs as well as the costs of information asymmetry associated with external finance and, in general, avoiding problems of financial constraint (Stein, 1997; and Rajan et al., 2000). These are two main competing arguments in financial studies. Although both are based on managerial discretion, they consider diversification decisions differently: as an output of opportunistic behaviors and as a way to promote firms' efficiency respectively (Hyland and Diltz, 2002; and Doukas and Kan, 2008) .

The main objective of this paper is to provide an investigation of various issues related to the diversification decision using cross-sectional data at the company level for the UK and Germany. We first review the insights on the determinants of the diversification decision that can be obtained from the theoretical literature. We then document how different firms' characteristics are related to diversification choices by estimating a diversification equation and interpreting them in the light of the theoretical predictions. Finally, we examine the relation between diversification and performance to better understand the consequences of financial antecedents of diversification on performance. This paper contributes to the above debate, investigating these issues using a sample of British and German unlisted firms.

Managerial Economics Journal, Corporate Diversification, British and German Non-Financial Firms, Theoretical Predictions, Managerial Discretion Hypothesis, Capital Markets, Business Units, Financial Traditions, European Firms, CASHFLOW, Financial Synergies, Monitoring Mechanism, Financial Variables.