Research On Impact Of Diversification Strategy On Firm Value From The Perspective Of Investors In Listed Companies

Diversification strategy is one of the overall strategies and growth strategies. Itis a behavior with long-term planning, which can guide the company’s developmentdirection fundamentally. Due to the important position of diversification strategy,the company will have large change if its diversification strategy is adjusted. Forinvestors, their purpose of investment is to obtain earning in the future, which meansthat it is necessary for them to analyze the company’s develoment trend and predictfirm value accurately. Hence, diversification strategy which can impact thecompany’s development direction is an important factor for investors to focus on.Nevertheless, there’re too much speculative behavior but not value investment inChina’s capital market. Though some investors choose fundamental fators, such asprofitability, leverage and so on as the basis of investment, what they consider islimited to financial factors, excluding strategy factor. Because of this, this paperdoes the research about how diversification strategy impacts on firm value from theperspective of investors.The study from perspective of investors is relative to the perspective ofcompanies. The two perspectives have differences on some aspects, which makesthat they have different views to evaluate firm value and the theoretical frameworkabout impact of diversification strategy on firm value is also different. This paperfirstly analyzes the implication of diversification strategy, firm value and investors,and then puts forward theoretical foundation about investors evaluating firm value.Based on resource-based theory, internal capital market theory, agency theory,asymmetric information theory, strategic management theory and inverstmentdecision theory, the paper makes investors’ information source as pointcut, andconstructs the theoretical framework about impact of diversification strategy onfirm value, which is the theoretical basis of the whole paper.As a strategic behavior, diversification strategy won’t impact on firm valuedirectly. It will impact on firm value through some paths. Under the guide of valueinvestment, the paper confirms capital allocation and analyst following as the keypaths. It’s because that value investors always pay more attention to the persistenceand consistency of companies’ operational efficiency. And value investors alwaysrefer securities analysts’ research results when they make investment decision.Based on internal capital market theory, agency theory and asymmetric informationtheory, the paper analyzes the influence mechanism of diversification strategy oncapital allocation, analyst following and firm value with the method ofmathematical analysis and normative analysis. The result shows that diversification strategy will make capital allocation efficiency and analyst following decrease, andmake firm value decrease at last.Except for static analysis about impact of diversification strategy on firm value,investors will care more about the valuation effect of diversification change. Theyneed to take the good chance to make their benefit maximum. Based on mergertheory and resource-based theory, the paper analyzes the influence mechanism ofdiversification patterns on firm value with the method of comparative analysis andevent study. The result shows that companies can change diversification strategythrough two patterns: development pattern in internal and merger pattern in external.And the capital allocation efficiency, analyst following and firm value in mergerpattern are all higher than development pattern, when the change of diversificationdegree of the two pattern is the same.In practice, investors always firstly use stock pricing model to evaluate firmvalue, and then make investment decision. So in order to guide investment practicebetter, it is necessary to bring diversification strategy into stock pricing model.Based on Fama-French three factors model, the paper modifies the traditional stockpricing model and tests it. The result shows that diversification strategy is one of theimportant factors to form stock price, and the modified model can explain more thanthe traditional one.Researchers always study the direct relationship between diversificationstrategy and firm value from the perspective of companies, which ignores theimpact of diversification strategy on firm value under some paths from theperspective of investors. And the existing research didn’t have research underdynamic environment and stock pricing model either. This paper bases on theperspective of investors, not only regarding diversification strategy as a strategicarrangement, but also emphasising its valuation effect and its function in theinvestment decision. In theory, the study provides a theoretical basis for the furtherresearch of diversification strategy and firm value. It helps to enrich and improvethe theoretical connotation. It helps to enrich the theory about firm value andinvestment decision. And at the same time, it contributes to reveal the influencemechanism of diversification strategy on firm value. In practice, the study can helpinvestors set up the philosophy of value investment to predict firm value based onstrategy factor. It also can help the listed companies improve their managementdecision, disclose strategic information and increase firm value. Moreover, thestudy can help the participators in capital market to clear their responsibility, protectinvestors’ benefit and promote the market to develop healthily.