Research On The Problem Of Agency In Chinese Family Enterprise Diversification

It is the share-dispersed corporation controlled by managers that is the focus of earlier research on agent morass in diversified company. It finds that the cost of diversification is higher than its benefit in all. That is to say, diversification hurts the value of firm. So why do managers chase scale-broaden firm by buying or investing? On theory, the agents will benefit more from those deals. They will be more powerful and rich. They will enjoy more on-job-consumption. On one hand, managers disperse their own human capital risks by diversification. On the other hand, diversification makes managers out of their peers. Such "lock-in effect" will lower career risk of managers. Then based on theory of managers robbing shareholder value, managers will cut down diversified strategy hurting firm value if they feel the pressure from corporate governance mechanism.After the Asian Finance Crisis, the mainstream began to focus on corporate governance of emerging nations. Know from mature ones such as U.S.A and UK, emerging nations have weaker institutional guarantee and their listed companies are share-centralized. Some research the phenomenon of diversification discount and conclude that it owes to the family with control power. This family displaces corporation wealth by diversification. When diversification merges with such "channel behaviors" as associated trade, it is more difficult to find this deal. Inland researchers also study the relationship between diversification strategy and firm value. But they are mainly keen on evaluating the hurt firm value. They seldom investigate the problem of "why" and "how". In stock market of China, there are a few cases that central shareholders rob of the puny shareholders. From these phenomena, we can observe that the only family control a lot of companies at the same time and broaden its business in many fields. That is, diversification strategy is stick to associated trade.Based on the literature and the existed research results, this paper proposes one four-dimension analysis framework:1. Equity structure. From this dimension, this paper focuses on two types of the principal-agent problem and their relationship with diversification strategy. One is in condition of centralized equity structure; the other is in condition of dispersed equity structure. They are the basis of whole framework. This part is based on contract theory, the principal-agent theory, and the incomplete contract theory and transaction cost theory.2. Control structure. In fact, it broadens the centralized equity structure. The vote ship of authoritative shareholder departs from the cash flow membership. This part is according to ultimate-controllership theory. What is more, authoritative shareholder expands his controllership by directly participating in firm’s operation by pressing on board director.3. Organizational structure. There are two forms of diversification in emerging market: corporate diversification and strategic business unit diversification. According to internal market theory, corporate diversification has realized benefits from internal market. It is nothing to diversify the affiliated company.4. Corporate governance mechanism. It observes that to how extend the external and internal governance mechanism can restrict the robbing behavior of great shareholders. Especially, the institutional lack increases the transaction cost and creates the opportunity for great shareholders to robbing of puny shareholders.After above analysis in theory, this research proves the theoretical assumptions by using the data of the Chinese listed companies in2004. the finds are following:1. There is diversification discount in the Chinese family-owned listed companies.2. The partial data demonstrates that diversification strategy is encouraged by dispersing risk.3. The data supports that diversification strategy originates from the efficiency of internal market.4. The positive research finds that diversified strategic business is passively related to firm value. Diversification strategy is stick to robbing benefits.