Diversification And Corporate Financial Performance

Diversification has been a hot topic of theorists’ academic study as animportant way of growth of enterprises, but empirical researches on therelationship between diversification and corporate performance have not formeda same conclusion. However, the diversification practice of enterprises does notstop because of the research mystery. Large enterprises are bound to diversity toachieve sustainable growth. Therefore, the study of the subject of diversificationcan not stay in the level of whether to diversify or not, it should set focus on howto diversify, how to improve business performance through diversification.The author believes that the mechanism and result of different types ofdiversification strategy on corporate performance are not the same. This articlestudies the motivation and mechanism of action on corporate performance ofdifferent types of diversification strategy, proposes the conduction mode that"The motives of diversification of enterprise affect its choice of diversificationtype, the type of diversification affect its performance of diversification”. Thisarticle draws the following conclusions by detailed theoretical analysis:(1) Fromthe perspective of value added, enterprises’ diversification is not simply tospread the risk, but to obtain synergies in order to increase shareholders’ value.(2) If an enterprise insists on diversification when it is difficult for the strategy toachieve synergies or synergies of the strategy are weak, it may be due tonon-rational agency motivation.(3) Synergistic effect increases the benefits ofdiversification and makes a positive impact on corporate performance, whileagency problem increases the costs of diversification and makes a negativeimpact on corporate performance.(4) Related diversification strategy canachieve synergy better in enhancing corporate performance, while unrelateddiversification strategy may due to an agency motivation more for its difficulty inachieving synergy, thereby increasing the costs of diversification, reducing thecompany’s performance.Finally, this article takes Tonghua Dongbao’s diversification as a case study,and finds that Dongbao’s unrelated diversification reduced its financial performance. The diversification discount is caused by agency problems withinthe enterprise determined by its unreasonable ownership structure andinadequate corporate governance. Therefore, the author raises some suggestionsfor diversification of enterprises: firstly, enterprises should take the performanceof shareholder’s self-made diversification as evaluation and assessment criteriawhen making diversify investment; secondly, pay attention to the synergies ofdiversification, carry out related diversification as far as possible and unrelateddiversification strategy prudently; thirdly, improve governance mechanism,inhibit the agency problem in diversification.