The Determinants of Diversification of Publicly Listed Firms in China

A majority of previous research in the diversification literature has focused on the performance consequences of diversification strategy, with less attention having been devoted to the determinants of diversification. This paper uses probit and tobit model to examine the determinants of diversification of publicly listed firms in China from 1999 to 2005, especially explore whether internal control mechanisms (ownership concentration and managerial ownership) can influence the level of diversification. The results indicate that there has been a growing trend toward industrial diversification for Chinese publicly listed firms; small or older firms have higher probability to engage in industrial diversification, while the level of diversification is positively related to managerial equity ownership and negatively related to ownership concentration. The paper concludes with some implications for practitioners.