Corporate Diversification in China: Causes and Consequences

Joseph P.H. Fan, Jun Huang, Felix Oberholzer-Gee and Mengxin Zhao

No 2008-3, CEI Working Paper Series from Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University

Abstract: We examine the diversification patterns of almost all publicly listed non-financial companies in China during the 2001 to 2005 period. More than 70 percent of the firms in our sample are diversified. We document that patterns of diversification strongly depend on firms' political connections. Former local bureaucrats are more likely than other CEOs to enter multiple industries. This effect is particularly pronounced in state-owned enterprises (SOEs) that operate in weak institutional environments. These companies are particularly prone to entering low-growth, low-profitability, and unrelated industries. Consequently, the performance effects of diversification differ sharply across SOEs and private firms. While the latter earn a premium from diversifying their operations, SOEs do not. Our results are consistent with the view that provincial and local governments push Chinese SOEs into unattractive sectors of the economy and that politically connected CEOs use their relationships to build corporate empires.

Keywords: Corporate Diversification; Institutions; China (search for similar items in EconPapers)
JEL-codes: D23 G32 G38 K42 P26 P31 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2008-04
New Economics Papers: this item is included in nep-cna, nep-dev, nep-law and nep-tra
Note: June 2007, Preliminary draft
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