Diversification Strategy And Capital Structure

The research of diversification is one of the most active research areas in Industrial Economics, Strategy Management and Corporate Finance in recent years. It is also a controversial topic. Diversification strategy of listed companies in China had been concerned by the theoretical circles since the late 1990s. However, there are few papers analyzing the diversification strategy of listed companies in China by standard methods till now. The papers using standard methods are always focusing on the empirical assessment of the relationship between diversification and corporate performance.The paper researched on the relationship between diversification and capital structure from the capital structure. The research analyzed the theoretical and empirical relationship between diversification and capital structure using data constructed from a sample of China's stock-market listed companies from 2004 to 2006. The result shows that there is not a notable relation between diversification and corporate performance. The level of diversification is negative related with the capital structure. Diversification strategy plays a significant role in explaining capital structure.Companies with high asses-liability ratio are more likely to implement diversification. Companies can lower the asses-liability ratio and adjust the capital structure. Many companies may finance in order to make a quick buck. The paper proposes several political proposals from the perspectives of regulators, capital market and the companies.