Abstract
This article investigates longitudinal changes in the relative performance
of business groups utilizing data on listed companies in China over
a 10-year period (1994-2003). Using a measure of firm value in the
stock market and panel regression methods, this article finds the
initially superior and eventually worsening performance of group-affiliated
firms compared with stand-alone firms. To explain the downward performance,
this article considers several alternative hypotheses, namely, institutional
development, increasing competition, diversification discount, agency
costs from state-ownership, and agents asset diversion behavior.
This article has found certain differences in the explanatory power
of each hypothesis. While the institutional development hypothesis
is somewhat weak, the increasing discount for unrelated diversification
as well as serious agency costs revealed in asset diversion in the
business groups can better explain the longitudinal decrease in the
performance of business groups. We find that while diversification
still creates values, its marginal contribution has decreased over
time, and that while the state-ownership variable negatively affects
the values of firms in general, it is not the cause of the worsening
valuation of business groups. © The Author 2010. Published by Oxford
University Press on behalf of Associazione ICC. All rights reserved.
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