Research On The Impact Of Listed Company's Diversification On The Interests Of Small And Medium-sized Investors

Investor protection problem is always the core of company governance. In the environment of our country's relative concentration of equity, the big shareholders, who are controlling the company, could protect their own interests effectively through affecting the company's decision making. So the small and medium-sized investors are faced with the threats from the misappropriation of management and controlling shareholders. It's urgent need to protect their interests. The listed company, as the recipient of capital, must undertake the due obligations to protect the interests of small and medium-sized investors, and take it into the consideration of the company's decision-making. On the other hand, when the enterprise is growth to a certain stage, it will be to diversify business in order to accelerate their growth and expand business activities. Then how this major business decision may affect the interests of small and medium-sized investors? This paper tries to test the impact of diversification on the two kinds of agency cost through our country's data of the listed company in 2007-2009, to investigate the impact of irrational diversification on the interests of small and medium-sized investors. Then it can provide useful information about how to correct the diversification behavior of listed companies, and protect the interests of small and medium-sized investors.Diversification can divide into rationality and irrationality. The latter kind cannot boost the company, so can't obtain scale and scope economy and risk reduction, transaction cost advantage and other significant benefits. What's more, it will aggravate the agency cost, and the great cost generated from the invalid of internal capital market, which will impact company's value and damage the interests of shareholders. At first, this paper uses ROE, EPS, MVR and Tobin's Q to measure the enterprise value, in order to test the impact of diversification on listed companies'value. The results confirme the diversification discount phenomenon, and indicate that Chinese listed companies'diversification decision is more irrational than rational and cause value destroyed.Additionally, the question of whom undertaking the irrational diversification discount's cost is explained based on two kinds of agency problems. The study distinguishes the actual controller's property right and administrative subject, and uses "administrative expenses rate" and "capital takes up" to measure the agency cost from management and controlling shareholders, then tests the impact of irrational diversification on the two kinds of agency cost. It is found that irrational diversification goes with the self-interested behavior of management and controlling shareholder, showing that the diversification degenerates into the tunneling channel of insiders in China, and the small and medium-sized investors actually become the cost undertaker of the listed company's irrational diversification. It is also found that the cost transfer behavior is most serious in the local state-owned holding company, and then is private holding enterprise, and the central state-owned company is more responsible to small and medium-sized relatively.Finally the impact of the irrational diversification on the listed company's earnings management and information disclosure is examined. The result shows that irrational diversification exacerbates earnings management and reduces the quality of information disclosure. It is confirmed that Chinese listed companies' diversification is just the tunneling channel of management and controlling shareholders. The cost from value loss in irrational diversification is transferred to small and medium-sized investors by masking the companies'real performance.