PRODUCT DIVERSIFICATION AND FINANCIAL PERFORMANCE: THE MODERATING ROLE OF SECONDARY STAKEHOLDERS

The challenges firms face increase with their product diversification levels because different product markets possess different sociopolitical issues. We argue that secondary stakeholders, as represented by various nonprofit or non-governmental organizations, serve as agents mitigating the external constraints embedded within sociopolitical environments. Firms should therefore maintain relationships with different secondary-stakeholder scopes commensurate with their product diversification levels in order to enhance financial performance. Analyzing a sample of U.S. Fortune 500 firms during the period from 1996 to 2003, we found that secondary stakeholders play a positive moderating role in the relationship between product diversification and financial performance. Furthermore, this moderating effect was stronger in the case of unrelated diversification than in related diversification.