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Diversification has been shown to improve the financial performance and increase the stability of firms in the manufacturing industry. The purpose of this study was to investigate the relationship between diversification and financial performance and stability in the foodservice industry. Rumelt's (1974) strategic diversification measure was utilized and modified to analyze the financial performance and stability of 73 sample foodservice firms from 1988 to 1991. The statistical tests showed no significant relationship between diversification and financial performance and stability of foodservice firms over the entire period. However, when the time frame was divided into two subperiods, before and during the recent recession, significant differences in market performance and accounting stability were found between diversified and undiversified groups. Business cycle does affect the relationship between diversification and …