The Relevant Research On Pluralistic Operation And Performance Of Traffic Enterprise In China

Since 1960's, a campaign of corporation combination appeared in western developed countries. About 93.8% of enterprises in America engaged in pluralistic operations, however, 60% of which returned back to core operations since 1980's. From 1968 to 1974, the stock price of eleven large corporations in America that most actively engaged in diversification decreased by 66.9%, although there were successful models like GE. In China, pluralistic operations of corporation have stepped into development period since 1990's. Haier Groups, which undertook extensive operations in industry of household electrical appliances, was widely accepted. Meanwhile, Giant Groups, which undertook extensive operations in industry of computers, real estate and nutritious food, finally fell into a bankrupt situation. Two corporations got distinct results though both of them did the same pluralistic operations. Then come the questions: Why American corporations returned back to their core operations? What did pluralistic operations, as an important developing strategy, bring about for a corporation? How well the performance of pluralistic operations is? What is the motivation of pluralistic operations? How is the monitoring ability of corporate governance structure when corporations make developing decisions? These questions attracted extensive attentions of business world and theory field. Scholars have achieved some findings, but conclusions are not consistent. Considering the huge difference of regime between western and our country, completely copying western corporate theory to establish developing strategy is not correspondent with Chinese basic condition. Most studies of diversification problems by Chinese scholars were made by normal methods and lacked support of empirical evidences. Although some of them made study by using data of listed corporations, there were obvious deficiencies such as short-term study period, static state and not differentiating industries of sample corporations. Especially for traffic enterprises, which have a original nature of monopoly, it is still uncovered in relevant researches whether they are suitable for pluralistic operations. The paper makes a deep research about performance of Chinese traffic enterprises, including results, motivation and monitoring ability of institutional arrangement of pluralistic operations. Finally, it provides some advices about management system reform and strategy formulation for traffic enterprises and their executives.The main structures of this paper are as follows:â… .Literature ReviewThis section is the theory base of the whole paper, which includes exposition of diversification theory, agency theory and corporate governance theory. In the meanwhile, it establishes the concept system and research scope of this paper, and then argues the relationship between pluralistic operations and performance, which is based on the framework of agency theory. While arguing about diversification theory, we make a deep and comprehensive exposition, including the diversification degree of traffic enterprises, entry mode, entry direction, theory thoughts of diversification effects and predecessor's empirical research results; we make a full analysis of possible inducement when senior management makes pluralistic operation decisions, which is also the study objective of this paper; Then we make a systemic analysis of various governance structures that can be used to monitor operation decision-making process.â…¡.An analysis of current situation of Chinese traffic enterprisesTraffic industry is a kind of service industry which can change the space state of transition objective, including railway, highway, waterway, airway and pipe way. Its service and operation has a nature of publicity and monopoly because of the existence of resources scarcity and scale economic effects. As the process of world economy globalization and China's industrialization and urbanization moves faster, traffic industry plays a more important role in developing national economy. Because of the existence of gaming equilibrium between economic and social performance of operation activities, state-owned economy predominates this industry. As the establishment of market economy status, traffic enterprises are switching to modern corporation system, whose competitive spirit get stronger than ever before. Current administration institution with a character of government direct intervention, however, has a negative effect on development of traffic enterprises.Up to end of 2006, there were 76 traffic industry listed corporations, including railway 4, highway 37, waterway 24 and airway 11. Among random selected 37 listed corporations, there were 27 samples which had a government-dominated structure mode. 14 of 19 highway listed corporations had absolute majority stockholders, which resulted in a misplacement of government and corporation, that is, monitoring of corporation turned into administration intervention. Furthermore, banks did not take part in operation decisions-making; senior managers who were nominated by majority stockholders did not have congruent interest with corporations and most of boards of supervisors were determined by senior management. Human resources did not become marketization and a prominent rising of compensations meant a situation of over-encouragement. Economical base cumulated by traffic enterprises became a prerequisite for pluralistic operation. Up to end of 2005, 24 traffic companies had been undertaking non-relevant pluralistic operations, 52% of total traffic listed companies; 19 companies had been undertaking relevant pluralistic operations, 41% of total. In highway industry, more than 90% corporations which undertook pluralistic operations were in a loss status. They used money collected from capital market to found related corporations, which did not accord with prospectus. Because of deficiency of management institution and investing monitoring system, their investing decisions were very discretionary.â…¢.Empirical research on pluralistic operations and performance of traffic enterprisesCorporations undertaking pluralistic operations can acquire economical benefits(Chandler, 1977; Teece,1980; Weston, 1970; Williamson, 1975; MyeSr and Majluf, 1984; Stulz, 1990; Gertner, Scharfstein and Stein, 1994; Stein, 1997; Lewellen, 1971; Shleifer and Vishny, 1992), but it can also increase operation risk due to entry of a new field(MyeSron, 1982; Harris, et al. 1982; Jensen, 1986; Grant.et al. 1988; Markides, 1992; Lamont , 1997; Shin and Stulz, 1998; Rajan et al.2000; Lamont and Polk, 2002). What are the effects of pluralistic operations for Chinese traffic enterprises? Trough theory analysis, we propose four hypotheses. This paper selects 46 traffic corporations listed in Shanghai and Shenzhen security market as study samples with ROA, CROA, Tobin Q and adjusted Tobin Q as indexes of performance, EI, HI, Sr, Segment, Related as indexes of diversification degree, number of trans-investing, ratio, return and degree as indexes of trans-investing, Scale, Lever, Age, Growth as controlling variables. Then we set models and use descriptive statistics to reflect sample distribution and specification; use relevant analysis to examine relations between variables; use regression analysis to show relationships between independent variables and dependent variables. Empirical results support hypotheses. Although currently the degree of diversification is not very high, it already has a negative effect on performance; Furthermore, loss of firm value caused by non-relevant diversification is more serious than relevant diversification. Trans- investing activities do not have significant contributions on firm performance and the more the degree, the worse the performance. Research on this problem fills the gap of current research field. Finally, it concludes that it is not suitable for traffic industry to undertake extensive pluralistic operations.â…£.An analysis of pluralistic operation motivations of senior management in traffic enterprisesWhy traffic enterprises still undertake pluralistic operations since it has negative effects on firm performance? Scholars have raised several theories to explain diversification motivations, such as excess resources transition theory, market power theory, risk diversification theory, core competence theory and agency theory. The first four theories show motivations with an objective of firm value maximization, but agency theory shows motivations with an objective of personal utility maximization. Considering special system background and management institution of state-owned corporations, this paper, from an agency theory perspective, argues motivations of pluralistic operations for senior managers in traffic enterprises. We see motivations as exogenous variables and then through observing interactive relationships among stock-holding ratio of senior managers, degree of diversification and firm performance, argues whether the motivations are dominated by risk avoidance or meeting personal benefits. We propose another four hypotheses and select Entropy and ROA as dependent variables; TEAM and CEO as independent variables by dividing senior management into two groups. To guarantee the consistence of research, samples of each section are the same 230 firm-year panel data. We use OLS to explain motivations of senior managers making diversification decisions. It concludes that the motivation is to meet personal benefits and effects on firm performance by ratio of holding stock and change of diversification are not significant, that is, there are no sufficient evidences showing whether the motivation is risk avoidance or meeting personal benefits. This means in traffic enterprises, decision-making authority is controlled by chairmen and CEOs. From another side, it shows that there are encouragement problems in these corporations.â…¤.An analysis of monitoring ability of pluralistic operation in traffic enterprisesFrom preceding empirical analyses, we prove that there are serious agency problems in Chinese traffic enterprises and management undertakes operational activities with an objective of personal utility maximization but not shareholders'value maximization. The paper, under the exposition of corporate governance theory and relevant literature review, argues the ability of governance structure in controlling agency problems of traffic enterprises that appeared when making pluralistic operation decisions. We divide corporate governance structure into several layers such as stock governance, creditor governance, board of directors governance and board of supervisors, and then find out several governance factors in each layer to analyzes whether each governance structure plays its due role, with a purpose of acquiring empirical evidences to instruct traffic enterprises how to optimize their governance structures. For this reason, we propose fourteen hypotheses, and use multiple regression method with the same samples as previous sections to analyze effects of each factor of governance structure on pluralistic operations. It shows that monitoring ability is different among traffic enterprises. Stock-holding ratio of state-owned, ratio of circulating A stock, ratio of first majority stockholder and Z index have a positive relation with degree of diversification, but with which stock-holding ratio of legal person and institution have a negative relation, though the results is not significant. Preceding results show that monitoring ability of stock governance is very weak. Debt to asset ratio is significantly negative relevant with degree of diversification, which shows liability, to some extent, can restrain pluralistic operation activities. Except that size of board of directors has significantly U-style relation with the degree, other variables are not significant among all board of directors'character variables, which shows board of directors'governance is not effective on monitoring pluralistic operations in traffic listed corporations. Size of board of supervisors is significantly positive relevant with the degree of diversification, which shows they do not play a due role. From empirical results, we further believe that one of the most important reasons for traffic enterprises undertaking pluralistic operations that harm a corporation's long-term development is the ineffectiveness of corporate governance. For a healthy growth of our country's traffic enterprises, the core work is to reform and optimize existing corporation institution arrangement.