| Diversification is a common enterprise investment and business activity. Although some companies have achieved diversify (or has already done) success, but a large number of domestic and international cases and academic literature have shown that diversity for businesses with high risk, companies need to be careful of the decision to diversify. However, in our corporate business practice, there is a puzzling phenomenon:on the one hand, some companies are already heavily in debt, or even on the verge of bankruptcy; On the other hand, they are still diversifying "actively", or still maintain a high degree of diversification status. The phenomenon that enterprises in high debt situations engage further in diversification with high risk is at odds with people’s economic counterintuitive, because it will undoubtedly increase the risk of bankruptcy of enterprises and ultimately can endanger the enterprises themselves and the interests of creditors. So what is the motivation of companies in the high debt situations is still "positive" to diversify? A more general problem is that how will debts affect corporate diversification and what is the inherent logic behind it? Especially considering China’s current financial market is not perfect yet, enterprises generally exploit financial leverage in the investment operations, a large number of companies pour in diversify tend to accumulate business and financial risks, an accurate understanding of the role of debt in the corporate decision-making of diversification undoubtedly has important practical significance.Theoretical research for motives of diversification to date has formed resource utilization, market power, internal capital market, asset portfolio, agency theory (shareholder-manager conflict perspective), CEO overconfidence and others theoretical explanations, however, they were not concerned about the role of debt for the corporate diversification. On the other hand, in the field of corporate finance, the basic theory of corporate capital structure (debt) affect investment behavior (diversification is a typical corporate investment behavior) is already quite mature, such as agency cost theory (including shareholders-managers conflict perspective and shareholders-creditors conflict perspective), financial contract theory, signal model, pecking order theory, which provide a potential theoretical foundation for analyzing the impact of debt on corporate diversification. However, these theories do not directly point out the effect of corporate capital structure on diversification, the corresponding empirical research is also very scarce. Therefore, using the related theories based on the effect of capital structure on investment behavior to analyze the effect of corporate capital structure on diversification and provide empirical tests, is not only helpful for the theoretical and practical understanding of the impact of debt on corporate diversification, but also useful for expanding the scope of application of theories, as well as providing more empirical evidence.About the specific impact of debt on diversification, there are two aspects requires further attention. Firstly, there are different types of debt, which are different in agency costs and debt governance; secondly, diversification typically includes two types:related diversification and unrelated diversification, and the risks and revenue of them are usually significantly different. The different types of debts and diversification may make the relationship between debt and diversification become more complicated. In addition, the underlying assumptions of the dominant theories of the effect of corporate capital structure on investment behavior is based on Western institutional context, which is quite different from China’s transitional economic environment, especially the characteristics of the state-owned enterprisesThis paper, based on theories of the effect of capital structure on investment behavior, considering China’s transitional economic environment, systematically analyzes the impact of the capital structure on diversification, and uses the data of listed manufacturing companies from2007to2010to carry out an empirical test.In this study, the main contents and conclusions include:Firstly, in general, for listed companies in China, the company’s overall debt has positive effect on diversification. There are two kinds of different views on the relationshiop between debt and diversification:one insists that debt has positive effect on diversification, mainly the asset substitution effect theory; the other argue that debt has nagetive effect on diversification, including debt governance, debt overhang and risk avoidance theory. In China’s transitional economic environment, debt has weaker governance effect than that in western countries due to the non-effective of the external governance mechanism. Meanwhile, the asset substitution effect of debt is stronger due to the fact that debt owners (especially banks) have weaker willingness and ability to supervise and restrict the non-effective financing and investing behaviors of debtors. Therefore, the company’s overall debt has positive effect on diversification in China.Secondly, the effect of corporate capital structure on different types of diversification differs, in general, debt (including overall debt, bank loan and business credit) has stronger positive effect on non-related diversification (compared to related diversification). Relevant theoretical and empirical studies have shown that, the risks and benefits of non-related diversification are both higher than those of related diversification. Therefore, most of the companies prefer non-related diversification than related diversification, which is quite more universal in China. Over the past decade, many manufacturing companies has entered into industries with higher margin (such as real estate, energy, mining, financial investments and other areas). According to the logic of asset substitution effect, debt boosts companies to seek investment opportunities with higher risks and benefits. Thus, debt has stronger positive effect on unrelated diversification than that on related diversification for China’s listed companies.Thirdly, different kind of debt has different effect on diversification. In general, compared to bank loans, commercial credit has stronger positive effect on corporate diversification (including the overall diversification, related diversification and unrelated diversification). Relevant theoretical and empirical studies show that bank loan is stronger in debt governance than commercial credit. Although the debt governance effect of bank loan in China is not so apparent as that in Western developed economies, the debt governance effect of bank loan is stronger than that of commercial credit. Therefore, commercial credit has stronger positive effect on diversification than bank loan.Fourthly, the empirical study of China’s manufacturing industry listed companies indicates that the relationship between debt and diversification are different between stateowned and non-stateowned companies,(a) The bank loan of state-owned enterprises has stronger positive effect on diversification than that of non-state-owned enterprises. The reason is that state-owned enterprises have weaker financial constraints and softer budget constraints than non-state-owned enterprises, which weaken the governance effect of bank loan on state-owned enterprises.(b) The commercial credit of state-owned enterprises has weaker positive effect on diversification than that of non-state-owned enterprises, due to the fact that commercial credit has stronger restrictions on state-owned enterprises.(c) The overall debt of state-owned enterprises has stronger positive effect on diversification than that of non-state-owned enterprises because that bank loan is the most important source of China companies’debt.Academic value of this study is mainly concentrated in the following three points:Firstly, based on theories of the effect of capital structure on investment behavior, this paper analyzes and empirical tests the effect of debt on diversification, providing a new perspective for the motivation of diversification, while the existing theories of diversification motivation are not concerned about the role of debt and debt governance.Secondly, using the data of China’s manufacturing industry listed companies, this paper empirically examines the effect of the corporate capital structure to diversification from multi-level, providing additional empirical evidence. The empirical tests include examining the effect of overall debt on diversification and comparing the effect of different kinds of debt (bank loan and commercial credit) on different kinds of diversification (related diversification and unrelated diversification) in China’s transitional economic environment.Thirdly, this paper, based on the institutional background of China’s transitional economy, analyzes and examines the impact of the capital structure on diversification and points out the important role companies’ownership type in the relationship between capital structure and diversification. In China, stateowned companies have weaker financing constraints and softer budget constraints than non-stateowned companies and most companies in western countries, resulting in the different effect of debt on diversification between stateowned and non-stateowned companies.In addition, this study is helpful to understand the effect of debt on diversification in reality (including the phenomena of enterprises with high debt seek opportunities of diversification). Meanwhile, this study also has reference value for companies’s risk control and diversification decision as well as creditor benefits protection. |
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