Diversification and Corporate Performance in China: An Agency Theory Perspective

ABSTRACT

This paper examines diversification and corporate performance relationship in the framework of agency theory. Contrary to most of the findings from Western developed countries and emerging markets, the study reports a statistically significant U-shape relationship. The finding is also inconsistent with the notion that managerial discretion contributes to the diversification decision and results in discount firm value. The robustness test confirms these results after controlling for other firm level variables. These conclusions suggest that the understanding in Western literature about diversification performance provided by the agency theory may not be automatically applicable to the case of China's companies, and a highly diversified corporate practice could still be beneficial in China.

KEYWORDS:

• Agent theory
• China
• corporate performance
• diversification

Notes

∗stands for the t-test value, and ∗∗stands for the sig. value.

Dependent Variable: SR.

Additional information

Notes on contributors

Xiaorong Li

Xiaorong Li is affiliated with the School of Economics at Nanjing University, P. R. China.

Kami Rwegasira

Kami Rwegasira is affiliated with the Department of Accounting Finance & Economics at Maastricht School of Management, The Netherlands.