Abstract: We investigate the motivation of firms to adopt diversification strategy and its impact on corporate performance against the backdrop of Covid-19. Our results show that firms are willing to diversify away from their existing business and into the production of epidemic prevention supplies if so doing requires low investment and can benefit more from overseas operations. Results from event studies on a matched sample suggest that firms adopting such diversification strategies received significantly more positive stock returns during the announcement period and in the long run, compared to the control firms. Moreover, firms that diversified into the new sector achieved better accounting performance than their peers after their foray into the production of pandemic-related supplies. The positive impact of diversification strategy on corporate performance is more pronounced for firms that are exposed more widely to the shock and financially constrained. This conclusion is consistent with the existing theoretical inference that diversification helps alleviate financing frictions. Overall, our findings shed light on the value of corporate diversification strategy in a period of global economic downturns.

Key words: diversification strategy, foray into a new sector, economic outcome, urban governance