Corporate Governance And Performance Implications Of Diversification Strategies

This paper empirically examines the performance implications of corporate diversification and the relationship between corporate governance and corporate diversification, by the sample of Chinese listed corporations that is listed before 2004 in China with a observation period from 2004 to 2006. This paper contributes to the existing literatures in two important aspects: firstly, by employing a panel-data fixed effect model, it aims at controlling the endogeneity of the diversification strategies to explore the value effect. Secondly, based on the corporate governance framework, it focuses on two facets of agency costs to investigate the motives of the firms' adopting a particular diversification strategy and the shift in the diversification strategy. The results reveal that there is a strong negative relation between the extent of diversification and firm value, diversified firms trade at a discount. Although the diversified firms had a poor corporate performance before adopting the diversification strategy, the corporate performance would be worse as the extent of diversification raises. In China, there exist two facets of agency costs, including the shareholder-manager agency costs and the controlling shareholder-noncontrolling shareholder agency costs, to affect the adopting of diversification strategy and the shift in the diversification strategy. The other shareholders' share proportions and an effective board mechanism will decrease the extent of diversification effectively.