Financial Effects Of Corporate Diversification

Since the1950s,the American strategic management expert Ansoff first proposedthe concept of corporate diversification, academics and practitioners on the study andpractice of the diversified issues did not stop. Chinese scholars since the late1990s,began to study the impact of diversification on firm performance, the conclusion is notexactly the same due to the different foreign markets and research methods andindicators. Major developed countries has diversified from a large-scale return to themain business, diversified management of companies in China is still relatively common.This paper is based on such a case, with reference to the existing research results,combined with the current situation of Chinese companies,I explore and analyze theeffect of diversification in China.In this paper, I make the companies of Shanghai and Shenzhen as samples and studythe diversification on the cost of equity,financial and market effects, and classifydiversification as related diversification and unrelated diversification, further study thedifferent diversification types on the cost of equity,financial and market effects. In thispaper, I calculate the cost of equity based on the GLS model, and I apply accountingindicators of earnings per share, return on total assets, return on equity and marketindicators of residual income and the Tobin’s Q value to measure diversified enterprisefinancial effects and market effects. I use dummy variable to distinguish between relateddiversification and unrelated diversification type, and use the entropy index EI tomeasure the degree of diversification, and add the asset size, the stake of the largestshareholder, the growth of business and the level of leverage as control variables toanalyze the diversification effect through empirical test of multiple linear regression. Theconclusion is an inverted U-shaped relationship between the degree of corporatediversification and the equity cost of capital; and is a negative correlation between thedegree of corporate diversification and earnings per share, return on total assets,returnon equity, residual income and is not related between the degree of diversification andTobin’s Q values on corporate financial effects and market effects; Relateddiversification has lower the cost of equity capital than unrelated diversification; relateddiversification has higher earnings per share and return on total assets than unrelated diversification; related diversification does not reflect a better performance thanunrelated diversification on return on equity，residual income，Tobin’s Q value.