An Empirical Study On The Motive Of Company Diversification And Its Relationship With Firm Value In China

With the development of China’s economy and society, more and more Chinesegrow up. Meanwhile, with the development of Chinese capital markets in the past10years, many Chinese companies started to get listed in A share market, which made agreat contribution to the improving of corporate governance and corporate operating.At current stage, whether to diversify its business is a quite important issue for manycompanies. This study applies the entropy index method to measure the degree oftotal diversification and related diversification, and manually calculated around6500data for700companies from year2007to2011. The regression results showed thatthe diversification strategy is not favoured by the capital market, which means thehigher the degree of diversification, the lower the firm value (represented by Tobin’sQ). And for those companies who have already diversify their business, the regressionresults showed that related diversification is better than non-related diversification inthe perspective of capital market. This study also considered other factors that mightinfluence the decision of diversification strategy including ownership structure,agency cost, natural of company and the volatility of gross margin of original business.The regression results showed that the higher the shares percentage held by top10shareholders, the lower the total degree of diversification, and if the management hada substantial proportion(more than10%) of shares, the lower the lower the totaldegree of diversification. There is no significant correlation between the degree oftotal diversification and the nature of company/the volatility of gross margin oforiginal business.