Diversification and the Internal Capital Market Building Motive in China

Abstract

This research extends the investigation of the diversification performance into the Chinese market, but with a specific focus on the issue of the internal capital market building motive being behind such corporate strategy. The empirical findings here provide persuasive evidence to suggest that, like firms in the Western countries, the Chinese firms diversify in search of, among other things, a financing solution to relax the constraints from the external capital market. However, inconsistent with most of the Western literature, the study does provide statistically significant evidence to support the proposition that in China, diversification is positively related to corporate financial performance when diversification is under the internal capital market building consideration. This new evidence implies that in China's economic and institutional environment, the benefits of building such an internal capital market within the conglomerated firm seem to offset its costs.

KEYWORDS:

• China
• diversification
• internal market