The Influence Of Diversification On Inefficient Investment And Financial Risk Of Chinese Listed Company

According to Markowitz modern portfolio theory,multi-variety investment can spread risks.However,a lot of facts show the collapse of large-scale enterprises is related to the diversification strategy.Therefore,can diversification strategy spread risks,especially the financial risk?It’s a problem that deserves further exploration.This study explores the middle mechanism between diversification and financial risks from the view of investment behavior,which is one of financial activities.By analyzing the portfolio theory,resource-based theory and agency theory,the paper discusses the effect of diversification strategy to inefficient investment and financial risk.The sample of this paper is a-share manufacturing listed companies from 2013 to 2015 in Shanghai and Shenzhen stock exchange.The hypotheses have been tested by using descriptive statistics,correlation test and multiple linear regression.Then the study found that:(1)The degree of diversification is positively associated with the financial risk,which shows with the improvement of diversification level,the financial risk will be higher.(2)The average diversification level of ST sample enterprises is higher than normal companies.(3)The degree of diversification is significantly and positively related to the over-investment,but negatively correlated with the under-investment.It demonstrates the enterprises tend to over-invest with the increment of diversification degree.(4)There are significant negative correlations between the degree of diversification and the return on invested capital of sample companies.It means the higher the degree of diversification is,the lower the return on invested capital is.This paper suggests that:portfolio theory is not suitable to explain the point that multi-operation can spread the financial risk.The results prove that diversification of enterprises will increase financial risk and lead to over-investment.In order to reduce the financial risk and restrict over-investment,first,the enterprises should not only remain cautious to diversification strategy,strip the non-core business in time,but also reduce vertical scale and pay attention to gain a sustained competitive advantage,like core competence.Then the diversified enterprise should put the management of risk in an important position and strengthen controls on the financial risk from the view of strategy.They should also pay attention to the evaluation for the investment projects,and build an evaluation and incentive mechanism related to them.The regulators should pay particular attention to the supervision and control of risk of the listed companies that engaged in diversification.The government is supposed to encourage the companies to specialize in operation and offer favorable policies to develop industrial cluster.