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

Abstract

This paper investigates the relationship between industrial diversification and firm valuation in a sample of 816 publicly listed firms in China. It contributes to the literature in three ways. First, it is one of the first studies of diversification and firm value in an emerging market dominated by partially privatized firms. Second, it explores the determinants of corporate diversification by considering some unique aspects of the agency and political conflicts inherent in China's transition toward a market economy. Third, it employs a number of empirical methodologies (instrumental variables estimation, the Heckman self-selection model, and propensity score matching) to examine the relationship between diversification and firm value. 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. In addition, 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. Moreover, non-government-controlled firms in growth industries that perform better are more likely to diversify. Overall, our results illustrate that the valuation effect of diversification depends on government control.

How does directors’ remuneration affect SMEs’ performance?

“…QRATIO has been used extensively in the accounting and finance literature to measure firm performance (Lin and Su, 2008;Tong, 2008). Following Martinez- Sola et al (2013), we also include two additional proxies including Market-To-Book ratio 1 (MKBK1) and Market-to-Book ratio 2 (MKBK2) as firm performance to test the robustness of the results.…”

Structural Changes in the Chinese Stock Market: A Review of Empirical Research

“…find that private firms with politically connected managers enjoy tax benefits, whereas local SOEs with politically connected managers are prone to more severe over-investment problems. Lin and Su (2008) find that 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. examine how government control influences the investment-cash flow relation and document that government control and political forces induce firms to invest more, even if the investment opportunities are poor, so that multiple socioeconomic objectives such as employment can be achieved.…”

Market for Corporate Control and Contractual Buyout (CoBO): A New 'Collective Ownership-and-Administrative' Strategy

“…The valuable contributions made by Bowman et al (1999), Bull (1989), Fox and Marcus (1992), Guo et al (2011), Jensen andRuback (1983), Loh (1992), Opler (1992), Reddy (2015aReddy ( , 2015d, Roden and Lewellen (1995), Shivdasani andWang (2011), Wright andBuck (1992), Wright et al (1994), Wright et al (2000), and helped as deep-seated pedestal to supply this well-structured theoretical framework for protecting the government, and sick companies on the initiative stones laid in the U.S., for example, RJR leveraged buyout by KKR & Co (e.g., Dalton, 1989;Landsman et al, 2002), smaller company LBOs (Malone, 1989), role of buyouts in restructuring Central and Eastern Europe , partial mergers in Japan (Park and Russo, 1996;Ushijima, 2010), partial acquisitions by Japanese firms in the U.S. (Chen and Hennart, 2004), LBO transactions in the Russian Federation (Kasparova, 2007), and industrial diversification and partial privatization (Lin and Su, 2008). Recently, Amess and Wright (2012) analyze the employment effects of PE-backed and non-PE-backed LBOs.…”

“…In this regard, strong evidence that government controlled diversified firms has lower Tobin's q 25 than nongovernmental controlled firms, whereas valuation effect depends upon government control (Lin and Su, 2008). Disinvestment used as a defense against takeovers (Lambrecht and Myers, 2007), further buyout concept can apply to acquire the falling firms.…”