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This paper investigates the relationship between industrial diversification and firm valuation in a sample of 816 publicly listed firms in China. It contributes to the literature in three ways. First, it is one of the first studies of diversification and firm value in an emerging market dominated by partially privatized firms. Second, it explores the determinants of corporate diversification by considering some unique aspects of the agency and political conflicts inherent in China's transition toward a market economy. Third, it employs a number of empirical methodologies (instrumental variables estimation, the Heckman self-selection model, and propensity score matching) to examine the relationship between diversification and firm value. The paper finds that when the decision to diversify is modeled as an endogenous choice based on firm characteristics, multi-segment firms have significantly higher Tobin's q than single-segment firms, even after controlling for factors such as ownership structure, ownership concentration, and growth opportunities. In addition, government-controlled multi-segment firms have lower Tobin's q than non-government-controlled multi-segment firms, providing evidence in support of the political cost hypothesis of diversification. Moreover, non-government-controlled firms in growth industries that perform better are more likely to diversify. Overall, our results illustrate that the valuation effect of diversification depends on government control.

The above article (DOI: 10.1002|mde.1447 ) was published online in Early View on 29 October 2008. Printing errors were subsequently identified in the article. Page 1: There should be no affiliation 'd' Page 1: Affiliation 'a' should read: 'Department of Economics and Finance, City University of Hong Kong, Hong Kong'. Page 14, 'Acknowledgements': The 'Acknowledgements' should read: We thank two anonymous referees, Sanford Berg, Joel Houston, Guohua Jiang, Alan Stent, Lihui Tian, Tracy Wang, and participants at the Fifth Annual China Economic Conference, the Sixth Annual International Conference on Financial Engineering, and the Journal of Banking and Finance 30 th Anniversary International Conference for their helpful comments and suggestions. The financial support from Lingnan University (DR07B2) and the RGC of Hong Kong SAR Government (No. LU3110|03H) is gratefully acknowledged. Su also wishes to acknowledge the financial support from the National Natural Science Foundation of China (Grant No. 70572065), the Ministry of Education of China (Grant No. 200403), the Guandong Project of Key Research Institute of Humanities and Social Sciences at Universities (Grant No. 04JDXM79001 and 07JDTDXM79005) and the Innovative Research Team Project of Jinan University (Grant No. 04SK2D03). However, we are responsible for all remaining errors of this paper.

This paper applies a two-stage, double bootstrapping data envelope analysis approach to investigate whether and to what extent various distinctive corporate governance practices affect productive efficiency in a sample of 461 publicly listed manufacturing firms in China between 1999 and 2002. We find that firm efficiency is negatively related to state ownership while positively related to public and employee share ownership. In addition, the relationship between ownership concentration and firm efficiency is U-shaped, indicating the presence of tunneling activities by the largest shareholder. Among three types of controlling shareholder, state exerts the most negative impact on firm efficiency, followed by state-owned legal entities. These results provide strong evidence that political interferences have reduced firm efficiency. It shows that the proportion of outside directors and the number of board meetings are positively associated with firm efficiency, suggesting that board of directors can be an effective internal governance mechanism. Furthermore, provincial market development, a proxy for the strength of external governance mechanism, is positively related to firm efficiency. Overall, our findings illustrate that restructuring state-owned enterprises via improvements in corporate governance has enhanced firm efficiency, but partial privatization without transfer of ownership and control from the state to the public remains a major source of inefficiency in corporate China. Copyright © 2008 John Wiley & Sons, Ltd.