The Comparison Of Diversfication Strategies Through Equity Investment And Industrial Investment In A-share Market

There's no uniform answer regarding the exact influence of diversification on firm's operating efficiency and risk. The main reason lies in that previous studies fail to include the impact of industries and the classification of diversification. This study constructs the complete industrial chain relationships for all A-share companies according to their actual work flows, in order to ensure an objective and accurate classification of diversification strategies. Meanwhile, this study develops the extra-return/risk model to effectively avoid the influence of industries, and concludes that neither the diversification along the industrial chain nor the unrelated diversification can do good to operating efficiency, and the real reason for diversification strategy is to smooth the operating results hence reduce the operation risk. Based on above conclusion, this study raises a hypothesis for the first time that the diversified equity investment could be an ideal substitute for diversification strategy by providing better operating return and lower risk, which is later justified by a series of tests. Therefore, in theory, this study indirectly proves the many advantages of equity investment over the real business investment. In practice, this study provides an achievable optimization plan in operations of firms in China.