Pyramidal Structure、Diversification And Firm Performance

As a corporate development strategy,diversification has been choosen by a great number of enterprises, it is also a part of Chinese enterprises’stage of development at present and later. Diversification has become a hot topic of corporate strategic management, industrial economics and corporate finance in recent years. On the one hand, diversification can bring to the enterprise internal capital market, diversify risk, scope of economic and other benefits to improve the corporate performance. On the other hand, diversification also brings negative effects like agency problems, excessive investment, cross industry subsidies and unreasonable allocation of capital etc. Diversification of different motives may bring different economic consequences for enterprises. From the perspective of agency problems, the organizational form of diversified enterprises often has the characteristics of the Pyramid ownership structure, the separation of control rights and cash flow rights under this structure, add the weak protection of investors in emerging markets, may make diversification become the product of the tunneling. Large shareholders may use it to expropriate minority shareholders’interests. So,will the enterprises of Pyramid structure do more diversification?If so, which type of diversification do they prefer? What kind of impact will diversification cause on corporate performance? This paper attempts to explore that whether the separation of control rights and cash flow rights and multi-level characteristics of Pyramidal under the structure make the ultimate controller have motives to do diversification as an access to obtain private benefits, which brings the diversification discount effect.This paper chooses Private Enterprises of Pyramid structure listed in Shanghai and Shenzhen Stock Exchanges in years 2011 and 2012 as samples, and take the diversification as the breakthrough point, to discuss the formation reasons of diversification and its influence on enterprises’ performance under Pyramid structure.This paper further subdivides diversification into related diversification and unrelated diversification to test which type of diversification does enterprises prefer under Pyramid structure and whether different diversification types produces different effects. The cross term of Pyramid structure and the degree of diversification index is introduced in this paper to test the relationship between the three.In this paper,the study comes to the following conclusions. First, there is a significantly positive relation between Pyramid structure and diversification level.The bigger the degree of separation of the two rights and more layers in the enterprises of Pyramid structure,the higher the degree of diversification, especially the degree of unrelated diversification. Second, diversification is negatively related to the corporate performance, especially the larger the unrelated diversification is, the worse the performance of enterprises. Third, For tunneling motivation, the Pyramid structure will increase the negative correlation relationship between the degree of diversification and enterprise performance. In enterprises of Pyramid structure,the greater the degree of separation and more layers, the worse the unrelated diversification will infulence the enterprise performance.The contribution of this paper has the following three aspects. First of all, this paper combines the Pyramid structure, diversification and firm performance as the organization structure, financial behavior and result together to study. The existing researches pay more attention on the relationship between Pyramid structure and corporate performance or the relationship between diversification and corporate performance, but haven’t reached the same conclusion.Most of the scholars discuss the diversification management of Chinese enterprises from corporate governance perspective, Rather than considering that diversification of different motivations may have different economic consequences.Therefore, exploring the motivations of diversification formation and its effect on the performance of enterprises of Pyramid structure,combined with the background of our system has important theoretical and practical significance. Second, this paper subdivides diversification types to study which type do the enterprises of Pyramid structure prefer and how different types of diversification affect firm performance.Third, Previous studies pay more attention to the economic consequences of diversification, this paper provides a supplement to research about the relationgship between the Pyramid structure and diversification.