An Empirical Research Of Shareholder Control’s Mechanism For The Consequences Of Diversification

At present, although diversification discount has been substantiated byconsiderable theories and empirical researches, diversification of the companies stillwidely exist. In the interior of the diversified company, there lies typical entrust-agent issue upon conflicts of interest between shareholders and managers, majorshareholders and minority shareholders. Shareholder control is basis of thecorporation administration, as well determines the performance of the company. Indiversification of the companies, controlling shareholders has a remarkable effect ondiversified operating result. Possibly, rent-seeking activities of controllingshareholders as well as benefit expropriation behaviors to non-controllingshareholders lead to diversification discount of corporations. In this paper, theinfluence on diversified operating results by the contradictions of interest betweencontrolling and non-controlling shareholders is attempted to be entirely analyzed, inorder to dispute the principles of diversification discount, the motivations ofdiversification operation and the reform methods of diversified company.First of all, this paper constructs the model about the degree of diversificationand earnings management, and discusses whether there exists higher degree ofearnings management in the interior of diversified company and motivation or spaceof rent-seeking activities by both management layer and controlling shareholders.Furthermore, concerning about the conflict of interest between controlling andnon-controlling shareholders, this paper theoretically demonstrates that controllingshareholders make twisted and anomalous decision criterion on investment on accountof the separation of cash flow rights and company controlling rights. On purpose toacquire oneself-profit, controlling shareholders encroach on the interests of othershareholders and eventually lead the lost of corporation value. Via the empiricalanalysis on the relation among interest of shareholders, increasement of sales andshareholder control, the influences on the diversified operating results by the controlof controlling shareholders is testified in this paper. The empirical analysis in this paper has illustrated that in terms of Chinese listedcompanies, the degree of earnings management is usually higher in the diversifiedcompanies. Besides, the degree will rise with the increase of the degree ofdiversification. The controlling shareholder can take advantage of the earningsmanagement for rent-seeking activities. Also, in the interior of diversified companythere are serious internal controller problems and huge agency cost. Controllingshareholder oriented their own interests to excessively pursue growth of sales bymeans of diversification, however, non-controlling shareholder much more value theshareholders’ interests. Conflicts of interest between controlling and non-controllingshareholders result in weakening or even offsetting the effect of company’s diversifiedoperation, and eventually lead to diversification discount. Controlling shareholdersaffect the company’s decision through such a series of behavior as to providemanagement layer a higher salary to motivate managers to make decisions in favor ofcontrolling shareholders.