A Study Of Government Intervention, Diversification And Firm Performance Launched By Chinese Listed Companies

As one of the largest emerging market countries, the Government of China has always played an important role in market economic activities. Most of China’s listed companies controlled by the government through non-tradable shares. Despite the number of private listed companies in the past20years also increasing, and private companies also contributed to China’s economic growth, but the SOEs still occupy the dominant position of the capital market. In recent years, a growing number of government policies tend to SOEs. In natural resources, civil aviation, real estate and financial sectors, the SOEs have been the expulsion of private companies (the Financial Times,2008; China Economic Weekly,2010). Therefore, the government ownership phenomenon and government policy interventions may affect the decision-making of SOEs. The government may input its objectives to the listed companies under its control through the intervention. For example, studies have shown that the government will intervene corporate operation behaviors because of their political goals, social goals and personal interests of government officials. With the help corporate diversification strategy, this paper will study the impact of government intervention in business behavior, as well as its economic consequences on companies’ performance. Because of institutional factors, for instance social management functions (such as the promotion of employment, pension, tax and maintain social stability, etc.) and private interests (political advancement and economic interests), the enterprises with government intervention will be driven to new investment to form large enterprise groups. But because of the existence of serious local protectionism, it is not easy to reach a certain size for the single business enterprise, so diversification becomes the choice to expand the scale of enterprises and to realize the multiple objectives of government. But this kind of diversification violate the principle of economic benefits, and will lead to the internal capital market (which formed by diversification)failure by caused excessive investment. And because of the special of principal-agent problem in the government intervention diversification enterprises, the principal-agent costs will increase, and these all eventually will lead to the diversification undermine the value of the companies.We draw on a sample of non finance and insurance industry A shares listed firms in Shanghai security market, from2009to2010. Involving a total of1190sample observations, we employ multiple regression analysis as the main analysis methods, learn from home and abroad studies, we established a model suitable for this paper and concluded the main conclusions of this paper:First, if the actual controller of listed companies is state-owned nature, it tend to operate more business sectors and easier to implement a diversification strategy. Because of the existence of government intervention, the government in order to complete social functions and its officials in order to obtain political promotion, they use their "convenience" of funding sources and financing conditions to form large enterprise groups through the diversification strategy to achieve its multiple objectives; Second, the listed companies’diversification with government intervention will undermine the company’s performance. Because their motivation of diversification is to complete the government’s social functions and political objectives, resulting in the internal capital market is not valid because of over-investment. In addition, this kind of diversification increases the company’s internal agency costs, so this kind of diversification against the principle of economic benefits, and the diversification damage the value of the company. This study has enriched the literature about the relationship of government intervention. Diversification and Corporate Performance of the transition period of emerging markets. It is also conducive to further rationalize the relationship between the government and enterprises during the transition economies.This paper consists of six parts:the first part is the introduction, including the background of this study, theoretical significance and practical value, the framework of the study and this article’s limitations and innovations; The second part reviews home and abroad literatures on the relationship between government intervention and corporate diversification as well as the relationship between diversification and corporate performance, to pave the way to make theoretical definition. Further, we issue some commentary on these literatures. The third part is theoretical analysis and the hypothesis of the research. In this part this paper proposes the hypothesis mainly based on the theoretical research at home and abroad; The fourth part is the study design, including the selection and definition of samples and variables, and the research model; The fifth part of the paper is descriptive statistics, correlation analysis and regression analysis; The sixth part is research results and policy recommendations of this article. First summarizes the content and conclusions of the article, and then according to the problems found in the fifth part of the study, we put forward the targeted recommendations.