Industrial diversification, partial privatization and firm valuation: Evidence from publicly listed firms in China

Chen Lin, Dongwei Su
2008 Journal of Corporate Finance  
This paper investigates the relationship between industrial diversification and firm valuation in a sample of 816 publicly listed firms in China, and contributes to the literature in three ways: First, it provides one of the first few studies on diversification and performance in an emerging market dominated by partially privatized firms. Second, it explores the determinants of corporate diversification by considering some unique aspects of agency and political conflicts inherent in China's
more » ... sition towards a market economy. Third, it employs an instrumental variable framework to examine the interrelation between diversification and firm valuation. The paper finds that when the decision to diversify is modeled as an endogenous choice based on firm characteristics, multi-segment firms have significantly higher Tobin's q than single-segment firms, even after controlling for factors such as ownership structure, ownership concentration and growth opportunities. An explanation is that non-government controlled firms that perform better and possess more cash are more likely to adopt diversification strategies and tend to diversify more. In contrast, government controlled multi-segment firms have lower Tobin's q than non-government controlled multi-segment firms, providing evidence in support of the political cost hypothesis of diversification. Overall, our results illustrate that the effect of diversification on firm valuation depends on firm's endogenous choice and the extent of government control.
doi:10.1016/j.jcorpfin.2008.05.001 fatcat:3fsm7rc5kjhkdpb3xv7iesj4ey