Research On The Impact Of Corporate Diversification On Financial Flexibility And Its Marginal Value

According to World Economic Outlook in July 2015, compared with October 2014, there is a more even distribution of risk for the global economic growth. Although the oil supply shocks remain uncertain, the fall in oil prices, as the main driving force to the upside risk, has played a strong role in promoting the global economic growth. The downside risks are mainly resulted from changes in market sentiment and volatility in global financial markets, especially the fall in oil prices which has brought about vulnerability to the oil-exporting countries in emerging market economies. In Euro Area and Japan, economic stagnation and inflation still deserve attention. We may come to the conclusion that the power influencing the current global economic evolution remains complicated, which means the overall uncertainty remains and it is hard to predict the future development trend.The economic crisis in 2008 has brought about severe shocks to the global economy. The statistical data showed that the companies declining in this economic crisis had a common feature. Almost all of them got into serious financial trouble and were not able to get out of it because of the break in cash flows resulted from the lack in financial flexibility. Instead, those who had sufficient flexibility not only saved themselves, but also raised low-cost funds to invest valuable projects and thereby enhanced their corporate value. Although exogenous high-impact events like financial crises are able to test the effectiveness of the financial flexibility in a more appropriate way, but Bancel and Mittoo(2004), Brounen et al. (2004) investigated the American and European business executives and found that in their opinion, the issue of financial flexibility is the most important consideration factor in the corporate capital structure decision-making. Accordingly, financial flexibility can not only help companies ride out a crisis or a storm, but also plays a vital role in daily operations, just like "Noah’s Ark".Financial Accounting Standards Board believes that financial flexibility is the ability to deal with unexpected demands and opportunities through the adjustment of cash flows. In the post-crisis era, enterprises are facing an increasingly uncertain economic environment. If they do not have this ability, it is more likely to be eliminated in the next economic cycle. In recent years, as an important business activity, corporate diversification has prevailed among Chinese listed firms. Its implementation impacts all aspects of a business, including financial flexibility. Therefore, if we can put corporate diversification and financial flexibility into the same framework, maybe we can provide new ideas for companies to withstand adverse impacts and deal with economic uncertainty. In addition, many empirical studies have shown that financial flexibility reserves can help companies seize valuable investment opportunities, thereby enhancing corporate value. So we wonder whether corporate diversification has an effect on the marginal value of financial flexibility. Aiming at these problems, this paper consists of the following six sections:The first chapter is an introduction. This chapter is mainly made up of the research background and practical significance of the topic, some related concepts, the train of thought, contents, method, framework and possible innovative points and shortcomings of this paper.The second chapter is literature review section. This chapter focuses on the literature regarding financial flexibility and corporate diversification. We comment on these research results and then propose our research direction.The third chapter is the theoretical basis and research hypotheses. Firstly, we introduce the internal capital market theory, balance theory and property rights theory. On the basis of these theories, we try to find out the influence path of the impact of corporate diversification on financial flexibility. Finally, we propose our research hypotheses.The fourth chapter is the empirical test design. The data sources, sample selection, variable definitions and model design are all included in this chapter.The fifth chapter is empirical analysis. This chapter is made up of descriptive statistics analysis, correlation analysis, multiple regression analysis, and robustness test.The sixth chapter is conclusions and recommendations. We summarize the foregoing findings. On the basis of the conclusion of this study, we come up with some recommendations and indicate the limitations of this paper.This paper aims to inspect the impact of corporate diversification on financial flexibility and its marginal value. The research object derives from A-share listed firms in China during the period of 2011 to 2014. Conclusions are as follow. (1) The internal financing advantages of a diversified business are able to affect its financial flexibility level. To be specific, a higher degree of corporate diversification may lead to a lower level of financial flexibility. (2) The nature of property rights can significantly affect the negative impact of corporate diversification on the level of financial flexibility. To be specific, the negative impact of corporate diversification on the level of financial flexibility is reduced in state-owned enterprises. (3) Financial flexibility has a "discount" effect, but it can be relieved by corporate diversification. However, this kind of effect from corporate diversification was not evident in practice.Taking corporate diversification as a starting point, this paper has expanded the research field of financial flexibility. With this research, we are able to make recommendations for the process of operating strategy decision-making, which has both theoretical and practical significance. Nevertheless, this paper still has some shortcomings which need to be further studied in the future. If possible, our innovative points are as follow. First, putting financial flexibility and corporate diversification into the same framework helps people to understand financial flexibility from the source, which has some theoretical value. Second, the introduction of nature of property right into this paper has enriched the forming path of financial flexibility. Third, the study has extended to the marginal value of financial flexibility, which makes the whole research more complete. If possible, our shortcomings are as follow. We have used some static indicators to measure the financial flexibility and the data are also historical, which cannot reflect the dynamic, changing characteristics of financial flexibility. In addition, although this measure has broad application, it is not good enough to reflect many other factors such as the macroeconomic situation, monetary policies and so on.