Research On The Relationship Between Diversification And Corporate Performance

Industrial diversification strategy has already become a common method to expand the scale and risk-averse for many companies. However, in the history of Western business, there are many cases of failure in diversificatio n strategy. Company in Europe and the United States gradually transform to professional strategic after experiencing a crazy wave of diversification. Is the industrial diversification a pie or a trap? Will the Industrial diversificatio n bring synergies or be over-investment? Will it bring market forces or cros s-industry subsidies? While Western companies have extricated from the dive rsification strategy, company’s diversification process has just begun in Chin a. So Explore the relationship between industrial diversification strategy and corporate performance will be more meaningful. In addition, we must reco gnize the differences in diversification type and industry also affect on corp orate performance differently. In order to have a more convincing conclusio n, we need to distinguish the related diversification and unrelated diversifica tion and different industries. In this article, we select1569samples in Shan ghai A-share listed companies from2009-2011, entropy index as diversified measure, ROA,ROE and Tobin’s Q as performance measures, to explore th e relationship through corresponding statistical analysis and empirical researc h.This paper is divided into six chapters as follows:Chapter I ExordiumThis paper firstly describes the research background of the article, the t heoretical significance and the practical significance. Then introduce the rese arch ideas and research framework. This chapter presents the assumptions an d empirical analysis from three aspects, including the degree of diversificati on, diversification type and different industries. The Research framework int erprets the research path through technology roadmap. Finally, this paper wil1use empirical research and normative research.Chapter II Literature ReviewThis chapter firstly reviews the mainstream theory of diversification dis count and the conclusions of the study from foreign and domestic scholars. The time of their research is mainly focused on the1990s; While China ste ps in diversification strategy much later than the developed countries in Eur ope and the United States. Domestic study is mainly to verify the applicabil ity of the conclusions in China. Then this chapter discusses the Diversificati on premium theory and Diversification uncorrelated theory. We find that sa mple selection, the choice of metrics play a decisive role in the results of t he study. The domestic existing research has two problems:the industry inc ome data is less reliable and industry factors have not been taken into acco unt.Chapter III Theoretical analysisThis chapter defines the concept and sort out the concepts of diversific ation strategy defined by famous foreign scholars in chronological order. Th en elaborate the concept of difference among industrial diversification, produ ct diversification, vertical diversification, horizontal integration, related divers ification, unrelated diversification.Then the article describes the market power hypothesis, the remaining a sset utilization hypothesis, Principal-agent hypothesis and the hypothesis of a sset portfolio.Finally, relying on the theoretical basis, this chapter analysis the relatio nship between the degree of diversification and corporate performance. Expl ained the diversification premium theory from four aspects:the economies o f scope, the internal capital markets, transaction costs, and debt capacity. Ex plained the diversification premium theory from five aspects:Industry barrier s to entry, X-inefficiency, management costs, cross-industry subsidies, over-in vestment.Chapter IV Assumptions and model designThis chapter puts forward five hypotheses to study how the degree of d iversification and the type of diversification affect on corporate performance. Then detailed descries of the sample selection methods and data sources. And introduce how to select and measure the independent variables, the dep endent variable and the control variable.Chapter V Empirical AnalysisThis chapter use descriptive statistics, correlation analysis, multivariate r egression analysis to examine the relationship between diversification strateg y and corporate performance. So that we can verify the previously proposed five hypotheses and found the existing relationship. Conclusion of the stud y hope to provide some reference of the diversification strategy of listed co mpanies of different industries in the sub-sector.Chapter VI Conclusions and RecommendationsThis chapter begins with the conclusions according to the four categori es of research model:1. Specialization strategy will improve market performance, while divers ification strategy will reduce the company’s market performance.2. Degree of diversification and market performance of the company w as negatively correlated.3. The relevant diversification and market performance of the company was negatively correlated, as well as the unrelated diversification.4. The market performance of the relevant diversified company is better than the unrelated diversified company5. The strategy to be applied in each industry is not the sameThen we put forward the following suggestions:1. Have rational understanding of diversification strategy, establishing th e company’s core competitiveness so that Diversification strategies can perfo rmance its advantage.2. Actively cultivate the internal capital market to achieve long-term de velopment. Through centralized deployment and optimize the use of internal resources, company could build the basis of the diversification strategy.3. Improve corporate governance and strengthen coordination between v arious business units to ensure the company’s operating specification.4. Grasp the timing of diversification strategy and select the diversified areas scientifically. 5. Have Scientific analysis of the internal and external environment to ensure that the diversification strategy has implementation conditionsThe main contribution of this article1. Research perspective has some innovativeThe affect of Industry factor on diversification strategy is undoubtedly very critical. Due to the cumbersome and heavy workload of the sub-industry research, there are only few scholars has studied the industry segmentation. In this paper, based on the classification of listed companies Guidelines standards, listed companies will be divided into19sectors, were investigated the impact of diversification on firm performance2. The selection of the variable is more scientificIn this article, the central question is how to choose the indicators of diversity. Entropy index is recognized as the most scientific measure. Due to the higher requirements of its industry classification standards and data manual processes, many scholars select other simple measure index. In this paper, through a long period of data collection and manual classification, we use the Entropy index to measure the degree of diversification, related diversification, and unrelated diversification.The limitations of this article1. Although the enterprise accounting system requires listed companies to provide segment reporting, but we found a large number of company dis closure its industries only including industrial and commercial to make data collection more difficult, resulting in the loss of the sample. In the process of manually classified information of listed companies, even if access to a lot of information, but subject to the limitations of their own knowledge, s till may cause some deviations.2. In this paper, the researcher’s interval selected only three years from2009to2011, but diversification strategy may have a lag imagine the impa ct on the company’s performance. If we can use a sample data for a longer period, the conclusion of the study is more accurate, more convincing.Future research trend of this study 1. Future researchers can continue in-depth analysis on the industry ch aracteristics of each industry, to Explore the suitable type of each industry when it use Diversification strategy2. Because of limited energy and take into account whether the data c an be acquired, the scope of this study focused on the Shanghai A-share lis ted company on the Main Board. However, some scholars departure from th e point of view of private enterprises and state-owned enterprises, to consid er the impact of the institutional context. With the rapid development of pri vate enterprises in recent years, the diversification strategy of the two comp arisons will be very meaningful.3. In the process of diversification strategy, in addition to the quantifia ble factors, we should consider the effect of the economic, legal and other factors. Because such factors can not be quantified and hard to establish mo del, this article does not take those factor into account. In the future it can become the new direction of in-depth.