The Relationship Between Diversification And Performance

Diversification is quite common in both academic study and in business practices. In both strategic management and financial management field,diversification is a fairly hot topic. There are quite many issues about diversification both in China and abraod, such as the motivations of diversification, influencing factors, relationship between diversification and firm performance, and so on. In this paper, we discuss the relationship between the degree of diversification and business performance. Although there are plenty of study findings in this field, no matter in foreign countries or in China, scholars never get a common consensus. Someone finds that diversification improves firn performance, someone finds diversification destroys it, and someone believes that there is no any connections between them at all. So we decide to research this problem in a more specific way. Specifically, we study diversification- performance relationgship basing on agency problems. In China, the agency problems between business owners and managers resent a dual structure. On the one hand, China’s state-owned(or state controlled) public firms, because of tenureand problem or other restrictions, such as the interests of management, would present serious agency problems. They may consume for themselves with embezzlement. They may carry out diversification strategy blindly in order to post a tenureand performance and maintain the stability of their duties. These behaviors may actually impair the interests of the owner’s business performance. On the other hand, Chinese private enterprises are established from beginning basing on market mechanism that resources are allocated by the market and competitive mechanism. So, decision-making of private firms is considered rational. Especially, China’s private enterprises are mostly family owned, business owners and managers are substantially coincident. Highly consistent with the fundamental interests of the owners and managers, the agency problem of Chinese private enterprises is almost negligible. Therefore, we believe that the diversification behavior of private enterprises should be based on rational strategic decisions, managers and owners are the results of consensus, and it should bring positive impact to business performance. In order to confirm the above assumption, we construct a panel data model. By using Herfindahl Index(HDI) to measure the degree of diversification, with return on equity(ROE) for measuring business performance metrics, as well as selecting company age, financial leverage coefficient, and asset size as the controlling variable, we construct an empirical research model. In order to make research results more objective and accurate, we construct a lag panel data model. This research collectes 1230 observations altogether, of a total number 246 companies(there are 201 state-owned or state holding enterprises and 45 private enterprises) in five years(i.e. 2008-2013. Because the dependent variable is lagged, they are actually five yeras). By using PCSE estimation methods, we estimated the parameters of the model performed, and tested the assumptions. The results show that the regression coefficient is rouguly consistent with our hypothesis, however the significance of some individual coefficient is not quite good. In the limitations chapters we explained and discussed this problem. These deficiencies can be left to further research. Other scholars also can study more deeply in this topic.