Ownership Structure and Corporate Diversification

Zhang Yi and Li Xi
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Zhang Yi: Peking University
Li Xi: Peking University

Business and Politics, 2006, vol. 8, issue 1, 1-21

Abstract: This paper examines the motivation and impact of corporate diversification in Chinese listed firms. We find that in local government owned-firms there is a non-linear relationship between the level of firm diversification and state ownership. As state ownership increases from zero, the level of diversification decreases. After state ownership reaches a certain level, the level of diversification increases as state ownership increases. There is no evidence that ownership is related to corporate diversification in non-state-owned firms or central government-owned firms. We also document that diversification is negatively related to firm performance in local government-owned firms. However, there is no evidence that diversification is negatively related to the firm performance in non-state-owned firms or central government-owned firms. Our findings suggest that agency problems are responsible for local government owned-firms taking value-reducing diversification strategies.

Date: 2006
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DOI: 10.2202/1469-3569.1144

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