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Founding Family, Diversification,and Corporate Performance

Author: YanRuLian
Tutor: ZuoYiZheng
School: Zhejiang Technology and Business University
Course: Accounting
Keywords: founding family control diversification firmperformance
CLC: F275
Type: Master's thesis
Year: 2013
Downloads: 68
Quote: 0
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Abstract


Diversification positively influences firm performance because it helps firm build its internal capital market and optimize its resource configuration. On the other hand, however, diversification causes risks such as agency problems, over investment, cross-industry subsidies, and unreasonable allocation of capital, leading to bad corporate performance. Researches have shown that different control types not only impact firms’ diversification level, but also influence the relationship between diversification and firm performance. Some successful diversification cases in Chinese founding family firms intrigued the question if founding family control has special influence on the relationship between diversification and firm performance.This paper chooses2367companies listed in Shanghai and Shenzhen Stock Exchanges between2008and2010as samples, and discusses the relationship between founding family control, diversification and firm performance. We divide our samples into founding family firms and non-founding family firms to see the relationship between founding family control and the level of firm diversification, and if founding family control impact the relationship between diversification and firm performance. This paper also subdivides diversification into related diversification and unrelated diversification to test if different diversification types influences firm performance differently.This paper draws the following three conclusions. First, there is a significantly negative relation between founding family control and diversification level. Founding family firms have a significantly lower level of diversification compared to non-founding family firms. Second, diversification level is negatively related to firms’ profitability, but founding family control weakens such negative relation. Founding family firms bear characteristics such as undiversified investment risks, the desire to operate the firm in the long run, and their protection over the firm’s socio-emotional wealth. Such characteristics greatly reduced the severity of agency problems in these firms, as well as the risks caused by diversifications. Third, in non-founding family firms, related diversification and unrelated diversification both bring significantly negative influence on firm performance. In founding family firms, however, unrelated diversification significantly reduces firm performance, whereas related diversification has no significant impact on firm performance. It is unrelated diversification that causes the negative influence in founding family firms. The contribution of this paper lies in two aspects. First, this paper subdivides founding family firms from samples to analyze how control type and firm listing ways impact firm diversification behavior. Existed papers have done detailed researches on control type, diversification and firm performance, but the diversification of founding family firms and how founding family control impact the relationship between diversification and firm performance have not yet called for concern. Researches have not reached a consensus on how diversification impacts firm performance, and this is largely because the division of the study sample was too general. Second, this paper subdivides diversification types to study how different types of diversification affect firm performance. Existed researches concerns little about different types of diversification of firms with certain control type. This paper believes that if related diversification and unrelated diversification are not studied separately, firms’diversification behavior cannot be fully understood. Diversification should be divided into related diversification and unrelated diversification to see which type of diversification causes the impact of diversification on firm performance; if firms with different control types and different listing ways exhibit different preferences to different types of diversification strategies; and if different types of diversification impact firm performance differently.

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CLC: > Economic > Economic planning and management > Enterprise economy > Corporate Financial Management
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