Title

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

Document Type

Journal article

Source Publication

Journal of Corporate Finance

Publication Date

9-1-2008

Volume

14

Issue

4

First Page

405

Last Page

417

Keywords

China, Corporate governance, Diversification, Partial privatization, Political costs

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.

DOI

10.1016/j.jcorpfin.2008.05.001

Print ISSN

09291199

Publisher Statement

Copyright © 2008 Elsevier B.V. All rights reserved. Access to external full text or publisher's version may require subscription.

Full-text Version

Publisher’s Version

Recommended Citation

Lin, C., & Su, D. (2008). Industrial diversification, partial privatization and firm valuation: Evidence from publicly listed firms in China. Journal of Corporate Finance, 14(4), 405-417. doi: 10.1016/j.jcorpfin.2008.05.001

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