Ownership structure and corporate diversification: Empirical study of Chinese small and medium enterprises

Abstract

Purpose Substantial previous researches find that corporate diversification lead to value erosion. Agency theory was an often-cited explanation to rationale decision maker's motivations toward diversification. With 144 Chinese public companies from the Small and Medium board in Shenzhen Stock Exchange, I explain how agency problems motivate Chinese public firms to diversify.

Data and methodology Sample firms used in my analysis are selected from Small and Medium board in Shenzhen Stock Exchange. I collect data on the number of business segments in which the listed firm operates in, segment sales data, and some financial figures from Worldscope database. Owner identity and shareholdings of ultimate controller are manually collected from sample firms' annual reports. Managerial and institutional ownership are collected from Wind database. Several OLS regression was executed to analyze their impacts on the diversification level.

Findings Firstly, I find a significant negative relation exists between managerial ownership and diversification level. This indicates that as the shareholdings of management increase, interests between manager's and shareholder become more aligned, and thus managers are less likely to adopt value-reducing diversification. Second, cash-flow right which proxy the equity stakes of ultimate controller are negatively between cash-flow right of ultimate controller's and diversification level for my sample firms. This provide the evidence on the align effects of interests between ultimate controller and minority shareholders. Third, I document a positive relation between the divergence between the cash-flow right and voting right of ultimate controller's and diversification level. When block holders hold much more voting power than their claims to the cash-flows, they tend to expropriate minority interest via diversification.