Internal Governance And Performance Implications Of Diversification Strategies

This paper empirically examines the performance implications of diversification strategies and the relation among ownership structure, corporate governance, and corporate diversification, by the sample consisting of 614 Chinese listed corporations with a total of 2456 firm years from 2001 to 2004, and contributes to the existing literatures in two important aspects: First, based on corporate governance framework, it focuses on two facets of agency costs to investigate the motives of firms adopting a particular diversification strategy and the shift in the diversification strategy; Second, by employing a panel-data fixed effect model, it aims at controlling for the endogeneity of the diversification strategies and data selection to explore the value effect. The paper's findings are that diversified firms trade at a discount; although most of firms adopt the diversification strategies, the degree of diversification will be reduced in the long run; the two facets of agency costs directly cause that firms choose diversification strategy and the degree of diversification is increased, which includes not only professional managers and dispersed shareholders but also controlling and non-controlling shareholders; the increased proportions of law (public) shareholders' shares, the balance of ownership structure and the monitoring mechanism of board effectively alleviate the agency conflicts, and the shift in the diversification strategy is likely to reduce the degree of diversification; there is a inverse U relationship between the concentrated corporate ownership and the level of diversification, There is a negative relationship between the proportion of law (public) shareholders' shares and the level of diversification, There is a positive relationship between the control rights of controlling shareholders(the excess control rights) and the level of diversification, the degree of diversification tends to be increased, when the Chairman of the board is the Corparate Executive Officer.