Ownership structure, corporate diversification and capital structure: evidence from China's publicly listed firms

Extant evidence on the effect of corporate diversification paid little attention to the role of diversification strategy on capital structure decisions. Using data from 789 publicly listed firms in China during 2000 and 2006, this paper analyzes financing choices of single-segment versus multi-segment firms. The paper finds that corporate diversification into related or unrelated industries has opposite effects on capital structure, after controlling for ownership structure and corporate governance mechanisms unique to China's transition toward a market economy. Consistent with the prediction of organizational economics, an increase in the degree of business relatedness is associated with a reduction in debt while an increase in business unrelatedness is associated with an increase in debt. In addition, there is strong evidence that government-controlled firms use less debt financing and that government ownership weakens the positive relationship between unrelated diversification and leverage. Overall, the empirical results indicate that diversification strategies affect corporate financing choices and that it is important to include ownership structure and governance mechanisms in studies of corporate diversification and capital structure.