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Corporate Diversification in China: Causes and Consequences

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

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Paper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number 2008-3.

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Length: 37 p.
Date of creation: Apr 2008
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Handle: RePEc:hit:hitcei:2008-3

Note: June 2007, Preliminary draft
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Related research
Keywords: Corporate Diversification; Institutions; China;

Find related papers by JEL classification:
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
P26 - Economic Systems - - Socialist Systems and Transition Economies - - - Political Economy
P31 - Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions

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