Wednesday, April 7, 2021
The Herfindahl-Hirschman Index (HHI) is one of the more commonly used measures in the Strategy and Economics literatures. While its principal uses are measuring market concentration or firm diversification, it has been extended beyond that. One concern with the measure is that an infinite set of distributions can have the same HHI. We assess whether that affects inferences. To do so, we replicate a prior study which employs HHI to test the impact of geographic diversification on firm value. We find that results with HHI are not robust across samples. We further find that decomposing HHI into its count and shape components reveals greater insights. In particular, we find that firm value increases in the number of units, and the similarity across them.