An Empirical Study Of Corporate Diversification And Financial Risk

Business diversification, which was the focus of study of corporate finance, hascaused wide attention of scholars both at home and abroad since1950s. So far, theresearch of diversification has being concentrated on the pros and cons of thecorporate performance. There are plenty of different conclusions and achievementsabout the study of business diversification, whose effect are mostly talked about.This paper will study the rationality of the enterprise business diversificationfrom financial prospect, which was studied relatively less in this field. The theoreticalanalysis and empirical research of Chinese listed corporations will be conducted toexplore the relationships between corporate diversification and financial risks later inthis paper, in which way we can provide feasible suggestion and decision-makingbasis in prospective of corporate financial risks. Firstly, this paper reviews thedevelopment history of diversification, and then proposes the problems to beresearched. The definition, classification and the measure method of businessdiversification strategy will be respectively defined to study the present situation ofbusiness diversification in China. Meanwhile, Z-score model will be introduced tomeasure the corporate financial risk and the Shanghai stock market listed companiesfrom2008-2011will be selected as sample data to conduct an empirical research ofcorrelations between corporate diversification and financial risks. The results showthat, the risk of the enterprise bankruptcy may improve since the enterprises expanddiversification in way of increasing corporate numbers in different industries;Corporate financial risks may decrease if it can guarantee the size of the mainbusiness and sales in the proportion of total sales while diversifying; Significantnegative correlation exist between enterprise related diversification and the financialrisk of the enterprise. That is to say, the more correlated of various industries are,theless likely the enterprises will bankrupt. While proving the impact of diversificationon corporate bankruptcy, this paper select cash flow, accounts receivable andAsset-liability Ratio to conduct a regression analysis to further investigate thefinancial risk effect of diversification. The conclusions are as follows: In our cashflow analysis, we find that the number of industries has no significant influence onenterprise cash flow,while the concentration of sales and correlation betweenbusinesses respectively have positive and negative significant influence on cash flow; The more business corporate has，the more accounts receivable there will be, and ifthe main business sales in gross sales accounts improves, the accounts receivabledecrease. Significant positive correlation exists between business correlation indexand accounts receivable; From the analysis of accounts receivable, we can concludethat business numbers and entropy value nave a positive correlation with it, whilemain business sales negative.