Diversification's Effect On Firm Value In China's Securities Market

Does corporate diversification create value? This issue has caused wide public concern. Based on the Western research and the practice in China, I develop empirical approach to study diversification's effect on firm value in China's securities market and try to find the reasons that can explain it properly.In the first part of this paper, the theories of diversification and firm value are reviewed and the benefits of diversification are analyzed against costs. Based on the theories, the diversification practice and empirical research in both USA and China are summarized.Taking stock market data from 2001 to 2003 on a sample, the diversification's effects on market value and financial value are tested. It is found that diversified companies' Q is significantly higher than those of the focused and the diversification premium is as much as 15% to 20%. When it comes to Return on Equity Before Tax, whether the companies diversify or not does not matter. The case study also shows the relation between diversification and firm value.In the last part I contribute benefit increase and risk reduction to the positive relation between diversification and market value. The diversified firms tend to be more adapted to the institutional context in emerging market. They may also create shareholder value by building business portfolio to reduce risk partly instead of investors in immature information-scarce market.