Research On The Relationship Between Degree Of Diversification And Internal Capital Market Efficiency

In the background of globalization, the conglomerate which is diversified hasgenerally become a popular organizational form in our nation because it hasadvantages in competition and development. Meanwhile Internal Capital Markets(ICM) was paid more attention by people. ICM is mechanism about capital allocationin internal company and different from External Capital Markets (ECM). ICM haspositive effects on alleviating financing problem, reducing transaction cost andoptimizing company’s capital allocation. However, some diversified enterprises isexperiencing business crisis because external capital markets and companygovernance is imperfect as well as the level of protection investors is not high. As aresult, there is a huge challenge on theory of ICM and diversification strategy.Therefore, this paper aims to do a research about the relationship between degree ofdiversification and ICM’s efficiency. Based on that research to illustrate whetherdiversification can make more contribution in ICM’s efficiency than specialization ornot.This paper firstly reviewed and summarized a lot of references that is related toICM and its efficiency. Based on the reference review, this paper demonstrated thetheory of ICM and its operational mechanism. In addition, it analyzed how about thedegree of diversification and managerial incentives affect ICM’s efficiency separately.Then there is three hypothesizes were proposed. At last, this paper uses publiccompanies in Shanghai Stock Exchange which has disclosed divisional report assamples. And then it takes empirical method to test the relationship between thedegree of diversification, managerial incentives and ICM’s efficiency. In this way, theauthenticity of three hypothesizes and theoretical analysis which was mentionedabove were proved.Through empirical test, some conclusions have been found. Firstly, the ICM inChinese public company is efficiency, but the level is not high. Secondly, efficiency ofICM in diversified company is higher than specialization, which depends on thecurrent level of diversification of our nation’s enterprises. Thirdly, ICM’s efficiencywill grow when the degree of diversification increased. Finally, appropriatemanagerial incentives will have a positive effect on allocation of internal capital and value of firms. According to the above conclusions, it is suggested low level ofdiversified companies should develop diversification strategy continuously. Apartfrom this, it is necessary to take a series of effective measures about improvingmanagerial incentives and external market supervision and strengthen corporategovernance to increase ICM’s efficiency.