Can the Survivor Principle Survive Diversification?

The survivor principle holds that the competitive process weeds out inefficient firms, so that hypotheses about efficient behavior can be tested by observing how firms actually behave. This principle underlies a large body of empirical work in strategy, economics, and management. But do competitive markets actually display what is efficient? Is the survivor principle reliable? We evaluate the survivor principle in the context of corporate diversification, showing that survivor-based measures of interindustry relatedness are good predictors of firm‘s decisions to exit particular lines of business, even when controlling for other firm and industry characteristics that affect the decision to withdraw from one industry or another. We argue further that his relatedness measure captures an important aspect of economic efficiency, not simply firms‘ desire for legitimacy by imitation, or attempts to temper multi-market competition. Hence confidence in the survivor principle is warranted, at least in this context.