An Study On Diversification’s Influence On The Capital Structure Of China’s Listed Companies

Since the inception of MM Theorem, research on corporation’s capital structure’s influence factors has been being the focus of capital structure’s research, although previous studies have confirmed that corporation’s profitability, scale and other factors have an important influence on corporation’s capital structure, these factors are still unable to fully explain corporation’s actual financing behavior. In recent years, corporation’s strategy factors have been introduced by strategist into the research field of corporation’s capital structure. Diversification, as one of the important strategies in business running, has raised concerns of scholars at home and abroad. Chinese enterprises have begun to pay attention to the strategy of diversification since1980s. In order to decentralize management risks, more and more corporations especially listed companies set out to adopt diversified business strategy, which will exert an important effect on their capital structure.This paper reviews Capital Structure Theory, Diversification’s Coinsurance Effect Theory and Internal Capital Market Theory, then analyses the mechanism that how diversification affects the capital structure. On that basis, this paper selects3000listed companies from2006to2008as samples, and empirically analyses the relationship between diversification and capital structure.First, this paper studies the effect of listed company’s diversification on the capital structure on the whole and finds that Diversification’s Coinsurance Effect Theory can explain the phenomenon that diversified company has higher capital structure than professional company as diversification can enhance the listed company’s ability of debt financing.Second, this paper studies the effect of corporation’s growth on the relationship between diversification and capital structure and finds that corporation’s growth will weaken the positive correlation between diversification and capital structure. Third, this paper study the effect of corporation’s profitability on the relationship between diversification and capital structure and finds that corporation’s profitability will weaken the positive correlation between diversification and capital structure.Fourth, according to the nature of the controlling shareholders in stake, this paper classifies the whole samples into state-controlled listed companies and non-stated-controlled listed companies to study the effect of ownership on the relationship between diversification and capital structure. It has been found that diversification has significantly positive effects on capital structure for the non-stated-controlled listed companies while diversification is only weak positively related to capital structure for the stated-controlled listed companies.At last, this paper studies the effect of financial marketization level on the relationship between diversification and capital structure and finds that as the financial marketization level improves, the positive influence of diversification on the capital structure of listed companies will decrease.