Equity Structure, Corporate Diversification And Firm's Value

The object of this research is unrelated corporate diversification.It has been well documented that the average diversified firm has been valued less relative to non-diversified comparable single segment firms. A sizable literature suggests that corporate diversification is a leading example of the benefit conflicts between shareholders and managers,block holders and small stock-holders. As we can see from the history and logic of corporate governance,corporate performance is determined by corporate governance and equity structure is the base of corporate governance. Based on the mechanism described above,we explore the causes of diversification discount,motive of corporate diversification in real world and ways to control these inefficient diversification behaviors.At the level of agency relationship between shareholders and managers,we develop a contracting model between shareholders and managers in which managers diversify their firms for two reasons:to reduce idiosyncratic and to capture private benefits. The key to this model is that we treat the managerial equity ownership as endogenous so as to analysis the general agency costs associated with diversification. We also quote authoritative empirical results to support the comparative static predictions of this model. Empirical findings suggest that the level of diversification is negatively related to managerial equity ownership and to the equity ownership of outside block holders. In addition,decreases in diversification are associated with external corporate governance mechanism. At the level of benefit conflicts between block holders and small stock-holders,we prove that divergence between cash-flow and control right of ultimate owner will leads to distortion of investment principle and loss of firm's value. Empirically speaking,East Asian firm's diversification is the way of ultimate owners to expropriate.As equity structure of Chinese listed companies are concerned,our empirical research suggests that acceptable situation should be relatively concentrated there are several diversionary controlling shareholders. Empirical research on the relationships between diversification and performance,equity structure and diversification level suggests that the value of diversified companies isn't significantly lower than that of single segment companies,which is related to distortion of Chinese capital market,but their ROE is lower than that of single segment companies. Furthermore,diversification level is positively related to legal person shares and negatively related to state shares. These results suggest that there are significant benefit conflicts between block holders and small stockholders in Chinese listed companies.As conclusion of this paper,we suggests that unrelated diversification will leads to decreases in efficiency of investment and firm's value. So,diversification should based on core capability of the company.