Research On The Unrelated Diversification And Risk Decentralization

In the circle of theory, a lot of literatures have carried research on diversification from views of Strategic Management, Industry's Economy, Financial Administration, etc..There is no identical conclusion so far. But in practice circle, for the question whether diversification improves the value of corporation or not, different enterprises provide different answers.Taking a broad view of relevant research on diversification, I found that the studies mainly analyze the affects from two threads. Around the relationship between enterprise's value and diversification, improving enterprise value or decreasing enterprise value is the main content that first thread studies. However, the research results in this thread had no universality. No matter the premium or discount, there are opposite examples exist. In addition, while appraising the enterprise's value, most empirical research adopts static models. But the enterprise's value is added up for a period, appraising it with static index can't fully prove the improvement or reducing due to diverse strategy. The second thread lays emphasis on the factors of choosing diversification of firms, carrying research on the motivations. As the reason for diversification, scholars in the field of Microeconomics, Company Finance Study, and Strategic Management explained it in a theoretical way from different facets. Although a large amount of research attempts to seek evidences to support these theories on the capital market, not every theory explained the motive to diversification effectively. From these two threads, it is unable to avoid a common topic: risk. This paper attempts to put up a bridge between motive and achievement with the risk, scrutinizing the diversification in views of risk, setting up a intact analysis frame.This paper was divided into six parts:Chapter 1: Introduction. It summarizes the purpose, signifinance, the logical thought, methodology and the frame of the paper.Chapter 2: It summarizes the main views on relationship between diversification and risk decentralization. The foreign scholars used the data on the western capital market to analyze the business risk in the diverse condition. These studies concentrated more on the systemic risk than non- systemic risk and had partly research results with the debt level and income fluctuation. Due to the lack of data, the research conclusion of the domestic scholars didn't have comparatives.Especi- ally the studies on non-systemic risk were rare, if there had a few, most regarded as part of the research .So the research on non-systemic lack the intact analysis frame, drawing the main content for this paper.Chapter 3: It mainly set forth relevant theories of this paper. It began with defining the relevant concepts: unrelated diversification and non-systemic risk. Then, it probed into the formation mechanism of the non-systemic risk from the point of products, technology, finance, and management when firms adopt diversification. Further, describing the relevant theories with the non-systemic risk in diversification is the main content in the fourth section in this chapter.Chapter 4: It proposed the realistic basis of the measurement of the diverse level and finally used the amount of industries on first letter and Herfindahl index to measure it. By analyzing the listed company of Shenzhen stock market of our country, I thought the overall state of our enterprise'unrelated diversification is low. Besides it, the study also found level of trade competition and the proportion of the fixed assets had influence on diversification .In addition, this chapter compared one-industry operation with diversification in risk decentralization from the financial index of earning capacity, debt paying ability, operation ability as to bury hint for the empirical research.Chapter 5: It is the key part of this paper, proposing supposing and carrying on experience to verify the theory. According to the motive to decentralize the non-systemic risk of diversification, this chapter proposed supposing 1: It is a reason of choosing diversification to decentralize the risk. Operating in the several industries in the mean time could ease the fluctuation of income and improve the level of debt, so proposing supposing 2: Risk level has a negative correlation with the level of diversification and supposing 3: Debt level has positive correlation with the level of diversification. This chapter use three index of listed in Shenzhen stock market from 2003 to 2005 to calculate the fluctuation rate of the risk to weigh the risk levels of enterprises, then, establishing logistic regression model to analyze whether motive to decentralize the risk would promote enterprises to adopt diversification. Subsequently, the author use the asset-liability ratio of the listed company of Shenzhen in 2005 to describe the debt level with risk level as the independent variable, Herfindahl index as the dependent variable, to set up plural linear regression model, investigating supposing 2 and 3 true or false. The conclusions showed: 1.The enterprises with higher risk level are inclining to choose diversification; the choice of the operation strategy has close relationship with current level of risk. 2. Risk level has a negative correlation with the level of diversification, and is significant. But the relationship between debt level and level of diversification is not significant.From the findings, the intention of this paper obtained the full realization. The paper had several innovated points as follows:1. Innovation of the thoughts of the paper. This paper combined the motive and performance together with the business risk, setting up intact framework to analyze the non-systemic risk, scrutinizing diversification in a new way.2. Innovation of the measurement of diversification level. Because of incomplete information from the annual report, the paper used the amount of industries on first letter and Herfindahl index to measure the level of diversification. Although this kind of method might underestimate the diversification level, it could remove information about related diversification to avoid overestimating level of unrelated diversification. In addition, the paper still divided the one-product operation and diversification by 0.19 with Herfindahl index value which could measure the diversification level more accurately owing to Herfindahl index dig the information under"10%"out.3. Innovation of the index of the risk. Enterprise's achievement links up with the risk closely and the risk disperses work though income fluctuates. The three income indices selected indicated the enterprise's achievement, and their fluctuating rate reflected level of risk. Like this, static performances can describe dynamic risk.Although the writing intention achieved, there are still some shortages:1. Deficiency of the data. The data in this paper was only from Shenzhen stock market, so the result of study may have deviations.Q2. Deficiency of the depth of the search. Because the information annual report revealed was incomplete, this paper only studied the unrelated diversification and lacked thinner division.3. Deficiency of the width of the search. Diversification influenced by a lot of factors, but this paper only considered the risk, so the final statistics may be affected by other factors.