Study On Diversified Investment And Corporate Value Of Listed Firms Based On Shareholder Characteristics And Government Regulation

The diversification strategy of listed companies has always been one of academic hot topics for a long time. The future development and operating performance of a company is directly determined by the corporation investment diversification strategy. So number of western scholars used agency cost theory (Jensen and Meckling,1976), portfolio theory (Markowitz,1952) ,resources based theory(Penrose,1959)and transaction cost theory (Williamson,1975) to explain the reasons of corporation investment diversification strategy. Some scholars have also used positive method to confirm the above theories, for example Lang and Stulz(1994).As an emerging market reformed from planed economy to market economy, on one hand, China is using western market theory to accelerate the building and development of Chinese market economy; on the other hand, its market reform path is not straight forward. Specifically the government maybe uses its administration right to excessively interrupt the market activities which will block the freedom of corporation decision and the mechanism of marketing (Xia, 2005).Based on the background of government economic regulations, this paper systematically analyzes the two methods of government regulation. On the one hand, the government is the ultimate owner of state-owned enterprises (Hereafter SOE); on the other hand, government can use its administrative right to interfere with the economy. The above government regulations lead SOE to face with distinct external financing constraint which is different from that of the private enterprises. Compared with SOE, private enterprises are more difficult to finance from capital market. The private enterprises have the incentive to use its listed subsidiary to finance from equity market and carry out diversified investment. Next, based on the traditional principal-agency theory, many executive managers in private enterprises are the stock holder's relatives or friends, so the interests of management and stock holders in private enterprises are more consistent. However, the managers in SOE don't hold the shares or not enough shares to encourage themselves to work hard (Wei, 2000). So the internal market in private listed enterprises is more developed than in SOE. So the private owned listed enterprises are more inclined to finance through internal market and adopt diversification strategy.Based on the above institutional background, this paper uses the data of listed companies in China from 2004 to 2005 and explores the reasons of diversification strategy of listed companies.This paper finds the following:First, compared with the listed SOE, private listed enterprises are more inclined to adopt diversified investment strategy. Second, the deregulation of local government has distinct influence on the private enterprises and local government-controlled enterprises. The private enterprises and local government-controlled enterprises in non-provincial capitals are more inclined to implement diversified investment strategy. third, the diversified investment strategy remarkably increases the gross profits rate of listed firms, but the ROS,ROA,ROE and Tobin's Q of listed firms are distinctly decreased.The above results indicate that:First, compared with SOE, the government regulations to capital market lead the parent firms of private listed enterprises are more difficult to finance from the external financing market. The parent firms of private listed enterprises have more incentives to transfer the investment items to its listed subsidiaries, which lead the private listed enterprises are more inclined to adopt diversified investment strategy.Second, in order to accelerate the local economic development, obtain more controllable financial resources and assess the local officials'performance, the local governments have incentives to deregulate the investment approvals of local private-owned listed firms and local state-owned listed enterprises.Third, the diversified investment strategy of listed firms is profitable, which can remarkably increase the gross profit rate of listed firms. However, because of the bad corporate governance in listed firms, most of the listed firms are controlled by large shareholders. So the actual controllers of listed firms have incentives to hurt the public investors'interest through related party transactions and perquisite which can ultimately reduce the performance and market value of listed firms.