Diversification and Performance of Group-Affiliated Firms during Institutional Transitions: The Case of the Chinese Textile Industry

Abstract

Problem statement: Business groups play significant roles and evolve with the changing institutional environments in many emerging Asian economies. A study of how the institutional transition and the resultant 'institutionally rooted evolution' of business groups affect the diversification outcomes of affiliated firms will therefore help to deepen our understanding of this unique organizational form. Approach: This study uses the 2001-2005 data on listed firms from the Chinese textile industry and estimates the diversification effects of all firms in the sample and the differences in the diversification effects between group-affiliated firms and their stand-alone counterparts. Results: A positive relationship is found between the listed textile firms' unrelated diversification and their firm value during the period 2001-2005. Furthermore, the results indicate that group affiliation has complicated impacts on the diversification-performance relationship of the listed firms. Although group-affiliated firms are more successful in pursuing unrelated diversification when compared with stand-alone firms, such a difference in performance outcomes is statistically weak (as measured by Tobin's Q). Furthermore, it is found that group-affiliated firms perform related diversification worse than their stand-alone counterparts (as measured by both ROA and Tobin's Q). Conclusion: At late stages of the institutional transition, as in China at present, the dominant influence of institutional environments on the diversification-performance link of firms still works and motivates business groups to evolve organizationally. Such an organizational evolution has complex implications for group-affiliated firms' diversification: the weak performance advantage from unrelated diversification suggests that business groups' organizational evolution may contribute to the persistence of the comparative strength of business groups' internal markets; the concurrent low outcomes from related diversification however suggests that the organizational evolution disrupts the interrelations inside the group unavoidably and therefore hurts the fundamental foundation for the realization of related diversification's value-creation tendency.

The impact of corporate diversification on firm value in Kenya

“…In this study, the techniques developed by Khanna and Palepu (2000) and Zhang (2011) to calculate Tobin"s Q (TQ) was used. The simplified version of TQ was calculated as the sum of the market value of equity plus the book value of total debt plus preference shares and this was divided by the value of total assets.…”

“…These control variables which included leverage, firm size, profitability, and growth opportunities have been utilized extensively in previous research on corporate diversification, such as Zhang (2011), Nazarova (2015, and Volkov and Smith (2015). The model aforementioned was empirically estimated by running the following regression:…”

Growth, institutions, and entrepreneurial finance in China: a survey

“…Within industrial clusters and business groups, where trust is relatively high between member firms, finer division of labour favors inter‐group trade credit thus lowering capital barriers to entry and increasing competitiveness, thus leading to higher TFP and exports (Fishman and Wang, 2010; Long and Zhang, 2011). The institutional environments, however, exercise dominant effects on the firms' diversification and performance within business groups and motivates these to evolve organizationally (Zhang, 2011). By the end of 1990s, the business environment in China had become more conducive to entrepreneurial activities: more than 12 million private firms were operating in China (Huang et al ., 1997; Tan, 2005; Haggard and Huang, 2008).…”

Does Family Business Group Affiliation In Real Sector Firms Really Affect Their Performance?

“…In line with prior business groups studies (e.g., Choi and Cowing, 1999;Gonenc et al, 2007;He et al, 2013;Lensink and van der Molen, 2010;Zhang, 2011; among others) we also use firmlevel control variables such as firms size, liquidity, sort-term debt, long-term debt, stock return volatility and firm age. Firm size is expressed as the natural logarithm of the book value of total assets.…”

“…Similar results are reported by Khanna and Rivkin (2001) for Argentina, George and Kabir (2008) for India, Gohar and Karacaer (2009) for Pakistan, Hernández-Trasobares and Galve-Górriz (2017) for Spanish. In addition to these results, empirical studies on many countries with different levels of institutional development reveal mixed results (i.e., positive, negative, or non-significant) regarding advantages of group membership in terms of accounting and stock market performance (see for example, Khanna and Palepu, 2000b;Chu, 2004;Lensink and Molen, 2010;He et al, 2013;Gunduz and Tatoglu, 2003;Gonenc et al, 2007;Selçuk, 2014;Carney et al, 2009;Zhang, 2011).…”