| From the listed company’s business segment reporting, we can see that fewer and fewer companies confine their own business in an industry, more and more companies adopt the diversified mode of operation, and there is a growing trend, this trend is prompting a growing number of academic scholars to study this mode of operation. However, research on motivation and economic consequences of diversification has not reached a unified conclusion until now. What is the motivation of corporate diversification? What is the economic consequence of diversification? Some companies adopt the diversification reached success, such as Samsung and China resource, while some companies caught in a dilemma. and even go bankrupt. such as Giant group and Sunjiu group. Why they choose the same diversification, but produced different result?In the study of diversification, people generally assume that participants are completely rational. the decision of diversification is the rational decision that participants made in the rational conditions, but in real life, because of subjective and objective conditions, participants may not be completely rational, are only bounded rationality, so the conclusions that base on completely rationality may not be able to complain all the phenomenon of diversification. In order to better complain the motivation and economic consequences of diversification, this paper will base on the limited rational hypothesis, from the perspective of managerial overconfidence to research the motivation and economic consequences of diversification.This paper firstly reviews and analyses the literature and relevant theories of diversification and managerial overconfidence, put forward hypotheses and test models, then select the study samples and collect data to study managerial overconfidence impact on the corporate diversification.Finally, this paper summarize the final conclusions of the study on the basis of the regression analysis, then propose recommendations, point out the limitations of the paper and the directions of future research.This paper uses the data from China’s securities market, managerial overconfidence is measured by the ratio of the executive compensation, diversification is measured by the entropy index, and enterprise risk is measured by the Z value. The impact of managerial overconfidence on diversification is examined by establishing empirical model. The results showed that:managerial overconfidence is proportional to the degree of diversification, the higher the degree of overconfidence, the higher the degree of diversification; the diversification of overconfident managers implemented increases the enterprise risk.There are three innovations in this paper:(1)Recently, domestic research on diversification research is mainly based on entirely rational assumption, from the perspectives of principal-agent theory and asymmetric information theory to study the diversification, it pay no attention to managerial background characteristics. This article will base on the previous studies, from the perspective of managerial overconfidence to study managers personal characteristics impact on diversification.(2) The current empirical researches on diversification focus on the impact of enterprise performance and enterprise risks, only a small empirical research to study the impact path. If people don’t understand the impact path, people will not take measures from the source to eliminate the adverse effects of diversification. Diversification and enterprise risk relates closely. This paper will study the impact managerial overconfidence on the risk of diversification, based on the studying of managerial overconfidence impact on diversification, in order to understand the specific impact path of enterprise risk.(3) At present, the domestic researches on manager overconfidence and corporate diversification mainly use the number of units and the Herfindahl index to measure the degree of diversification, only a small people use entropy as a measure of diversification, no one using entropy as a measure of diversification research managerial overconfidence effect on diversification o diversification risk. This paper will be the first that using of entropy as a measure of diversification to study the impact of managerial overconfidence on enterprise risk. |
