Analysis On Diversified Corporation Performance From The View Of Endogeneity

Diversification is a corporate strategy expanding into a new segment of an industry that the business is already in, or investing in a promising business outside of the scope of the existing business. With abundant capital and accumulated resources, many corporations choose diversification strategy to seek breakthrough, especially when their development reach bottlenecks. As our country is developing rapidly, traditional industries are facing challenges from emerging industries as well as excessive competition of their own. Under such background, some corporation may diversify so early without enough preparation that reduces their own value.From the view of corporate finance, we can conclude advantages of diversification, which are Economies of Scope, Synergy Effects, More-Money Effect and Smart-Money Effect in internal capital market. Its disadvantages include Overinvestment and Underinvestment caused by information asymmetry and agency conflict. Until now, empirical analyses with different samples and measures have formalized different points of view:Diversification Discount, Value Equilibrium, and Diversification Premium.However, considering interactional dynamic process between corporate diversification and performance, more analysis begins to focus on the endogenous relationship between them. Villalonga (2004), Campa and Kedia (2002) agree with diversification premium if the endogeneity of diversification is controlled. Sun Gebing and Hu Pei (2010) argues with Hong Daolin and Xiong Dehua (2006) about the Chinese market situation.This paper raises the threshold of diversified corporation from a sample of China’s stock-market listed companies, and uses their annual data from2001to2012. Unlike most domestic papers using index method, this paper applies chop-shop by Lang and Stulz (1994), which gives a clear comparison between diversified corporation and focused corporation. Besides, this paper controls corporate characteristics which affects the endogeneity, and screens the sample to eliminate endogeneity. The result shows that, Diversification Discount does exist in Chinese market, but after controlling the endogeneity, it is not statistically significant in the contrast, which means diversification itself is not the root cause of corporate performance reduction. As we can’t see any evidence for Diversification Premium either, it also shows that diversification can’t make up the deficiency of external capital market.On the whole, a corporation who wants to diversify should build a healthy internal capital market first. With abundant resources, technology and reputation, the corporation can seek a successful diversification result. On the other hand, relevant national departments should also improve laws and regulations supervision mechanism in external capital market, so the two markets will impact each other and grow together healthily.