A Study Of Corporate Diversification And Performance Based On Ultimate Controller

A numerous works focused on diversification about foreign firms provide a beneficial perspective in analyzing the choice of scope strategy in domestic companies in China.But those theories and literature are not suitable thoroughly for explaining the cause and performance of firms' diversifying behaviors in China,which is characterized by emerging market and transitional economy.Within the context of the listed companies in China,this paper follows the thinking route "ultimate controller(motive)-diversification(behavior)-corporate performance (result)",and comprehensively considers those theories,such as the agency,transaction cost and government intervening doctrines.Based on the systematic describing about the characters of ultimate controller and firms' diversification,the paper investigates the influence of ultimate controller on firms' diversification,and attempts to identify the diversifying motive which may be implicit.Furthermore,the paper examines the effect of diversification on the corporate performance in the perspective of ultimate controller, by means of setting the interaction items with the variables which indicated the characters of ultimate controller and corporate diversification.The paper indicates,(1) Government intervention is the major cause makes the level of diversification and performance show a significant difference among the companies which is controlled by the central government,local government and the private.(2) There exists a U-shaped relationship between the levels of ultimate controller's control and corporate diversification.Correspondingly,the relationship between the diversification and the corporate performance appears an inversed U-shaped profile in government controlled companies.However,maybe there exists internal market function in private companies;foregoing relationship is not appearing here.(3) Diversification does not become the expropriating means within the context of the deviation between the control right and the cash flow right.Corresponding to that evidence,the corporate performance does not show a significant decrease than other companies'.(4) For the internal market function can be realized under the group platform,the companies controlled indirectly by ultimate controlling shareholder do not prefer diversification.Furthermore,maybe there exists internal market under the group platform;the diversified performance of the indirectly-controlled companies is higher than others',but the relationship has no statistical significance.Based on the aforesaid analysis and the context in China,the paper indicates that the positive effect lies in those reforms and improvements,such as avoiding excessive intervention of government,bettering the ownership structure,reinforcing the balance between the ultimate controller and the other shareholders,optimizing the internal market function within group to alleviate agency problems,etc.