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An Empirical Research on Corporate Governance and Diversification in China’s Listed Companies

Author: XuJuan
Tutor: ChenGongRong
School: Hunan University
Course: Accounting
Keywords: corporate diversification corporate governance diversification discount principal-agent
CLC: F276.6;F224
Type: Master's thesis
Year: 2008
Downloads: 134
Quote: 1
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Abstract


For quite a long time, there has been a heated debate on corporate diversification, the most controversial of which is whether the diversification is value-enhancing or value-decreasing. Considerable domestic and foreign empirical researches and cases have demonstrated that diversification destroyed firm value, which made diversification criticized a lot. After examining the diversification causes, it is found that diversification may be motivated by the agency problems but not for the maximum of corporate value.On the view of theoretical analysis, managers and controlling shareholder can take private benefits through diversification that does not necessarily increase corporate value, and even the imperfect corporate governance in China induces the managers and controlling shareholders to respond to their own best benefits. So the good corporate governance including internal and external governance can monitor the managers and controlling shareholders effectively and prevent them taking private benefits through diversification.Our empirical research results show that: in board of directors governance, the percentage of independent directors as well as CEO duality is inversely related to the propensity of diversification, but the correlation is not very significant; in compensation incentives, the ratio of manager shareholdings is inversely related to the propensity of diversification significantly; in ownership structure, there is a strong negative correlation between the ownership concentration from top2 to top10 shareholders as well as the first block shareholdings and the propensity of diversification; in debt financing, the debt ratio is positively related to the propensity of diversification; in external governance, the more fierce the competition in the takeover markets is, the less diversified the corporate will be, furthermore, there is a positive correlation between the investor protection and the propensity of diversification. Our results reveal that independent directors and debtors perform their monitoring duty ineffectively, and check-and-balance ownership structure, managerial shareholdings and external takeover markets can prevent the sub-optimal decisions effectively.This study explores the influence of corporate governance on diversification both theoretically and empirically, and checks the agent perspective of diversification causes, which contributes to the researches on diversification. Also, this study analyzes the efficiency of corporate governance from a new perspective of corporate investment decisions, which is also a new explore to corporate governance.

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CLC: > Economic > Economic planning and management > Economic calculation, economic and mathematical methods > Economic and mathematical methods
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