Diversification、Financial Constrained And The Marginal Value Of Cash

According to most scholars’ study, when the operating performance in adiversified company is poorer than a single company, it indicates the presence ofdiscount phenomenon. Because of the lack of standard basic, there is still no fixedconclusion. Berger and Ofek(1995) were the first to make a clear discussion andexplanation in the study of the diversification discount. They treat various businessunits as independent units. And if the sum market value of these units are more thanthe actual value of company, it proves the existence of diversification discountphenomenon. Other scholars measure again using this method, and a great amount ofevidences show that the value has reduced. However, there are still many argumentsabout the “diversification discount theory” and “diversification premium theory”.Chinese scholars’ research on diversification, is mostly limited to the analysis onthe value of the company or ownership structure, and is lack of sufficient or latest data.In addition, many studies only use Tobin Q value and financial indicators, which isn’ta valid method for analysis. The paper tends to study through the channel corporatecash holdings how diversification affects company value to participate in the debate.From the view of internal capital market and financial constraints, this paper selects2006-2011non financial listing corporations in Shanghai and Shenzhen stock marketas a sample, using the marginal value of cash model of Faulkender and Wang(2006).Then, we add the diversification dummy variable into the model and use themixed-series panel regression method to study how diversification, financialconstraints, cashholdings level and the financial leverage affect the marginal value ofcash.The paper constructs as the follows “put forward the research background, ideasand methods-literature review and comment-research design and hypothesis-empiricalanalysis and results-conclusions, suggestions and prospects”. The study finds:(1)Corporation marginal value of cash is lower than the book value. That is, ifcorporation increase1yuan for holdings in cash, the actual value increases0.52. Itinterprets as that the agency cost of holding cash is higher than the income of reducingthe external financing cost.(2) Marginal value of cash is negatively related to the cashlevels;(3)The higher financial leverage level is,the smaller marginal value of cash is;(4) Compared with a single company, diversified company holding additional cash will have higher marginal value. In diversified company, extra one yuan will bring0.754yuan of marginal cash value. In single company, extra one yuan will bring0.612yuan of marginal cash value.(5) Compared with the low constrained financialcompany, high constrained financial company will have higher marginal value;(6) Ina high constrained company, diversification will increase the value of cash holdings;(7) In a low constrained company, diversification doesn’t increase the value of cashholdings.The empirical results show that, from the overall level, diversification canincrease the value of cash holdings with premium effect. At the same time, theinternal capital market in the diversification company can be helpful to ease financingconstraints faced by enterprises.