A Study On Diversification And Corporate Performance

Since Wernerfelt and Montgomery (1988), Lang and Stulz (1994), Berger and Ofek (1995) found the phenomenon of diversification discount, a large number of scholars of corporate finance discuss the subject. The point that diversification harms firm value has gradually become the consensus of fianancial theory. The relationship between diversification and corporate performance has become a major research focus in the field of corporate finance. In the context of emerging market ecomomics of China, the objective conditions that laws are incomplete and corporate governmance are inadequate make the relationship between diversification and corporate performance of China's firm differ from their werstern firms. In order to investigate the relationship between diversification and corporate performance of Chinese firms, the paper analyzes the data on the industry revenue composition and relative finance and accounting of 320 listed companies from 2001 to 2006, combined with the institutional background of Chinese listed firms, we study the relationship between diversification and corporate performance of China's listed companies deeply and systematically.Using panel data procedure for a sample of 320 Chinese companies listed on the Shanghai Stock Exchange over the span from 2001 to 2006, we have analyzed the effects of diversification on corporate performance. On the basis, we docompose entropy index into related and unrelated entropy index, and focus on the impact of related and unrelated entropy index on corporate performance. The regression results show that, in general, the relationship between diversification and firm performance is negative; unrelated diversification has negative relation with performance; related diversification has positively correlated with corporate performance. Our findings highlight the importance of distinguishing different diversification strategies. For Chinese listed companies, we suggest that the implementation of the diversification strategy should be cautious.For the existence of diversification discount in Chinese listed companies, we have analyzed the reasons of diversification discount. The research results find that, first, the higher degree of diversification is, the lower asset turnover, that is, the higher agency cost. Second, the higher degree of diversification is, the lower cost efficiency. This shows that the reasons of diversification discount of Chinese listed companies are the high agency cost and cost inefficiency. This provides an empirical basis for diversification discount of Chinese listed companies. Meanwhile, the results develop and innovat the literature related to diversification discount.This article examines that government intervention impact on diversification and its economic consequences. The results show that listed companies directly controlled by government are more likely to diversification. Due to more consider the political objective and social function, contrary to the principle of economic benefits in enterprises activities, this leads to that diversification of government intervention harms corporate performance. The study enriches the diversification litreture of the emerging market, and deepens the awareness of the relationship between government and enterprises.According to the samples of 320 listed companies from 2001 to 2006, we study the joint function of financial leverage, diversification, and corporate performance. In a unified framework of financial leverage, diversification and corporate performance for the systematic study, we establish the simultaneous equation model (SEM) in order to study the interaction. Previous research shows that compared to specialized firms, diversified firms tend to have higher free cash flows and fewer high net present value investment opportunities. Consequently, agency costs associated with potential overinvestment are greater for diversified firms. The literature also proposes that financial leverage should reduce agency costs. Consequently, we expect that performance of diversified firms increase with financial leverage. However, our empirical results show that performance of diversified firms decrease with financial leverage.