CFS021002HK-ZWE391-ql Discussion of Ownership structure and diversification strategies (by Shao, Jun from Nankai University) Qiao Liu, HKU Corporate Governance Research Incubator November 5, 2005

Focus of This Study – the impact of ownership structure on diversification This study presents an interface of two large literatures  Managerial empire building incentives. E.g., Jensen, 1986; Stulz,  Managerial entrenchment argument. E.g., Berger and Ofek (1995)  Tunnelling activities by the largest shareholders. E.g., La Porta, et. al., 1997, 1998, 1999, 2000, 2001; Fridman and Johnson, 2003; Johnson et al., Corporate Governance/Agency problems  What determine the degree of corporate diversification? E.g., Dennis et al., 1997; May, 1995; Aggarwal et al.,  Diversification discount? Numerous research attempts. Corporate Diversification China’s capital market present itself as an ideal testing ground for two reasons: (1) rampant bad CG practices; (2) strong corporate incentives to go diversification.

Main Hypotheses to Be Tested H1: The relation between diversification and ownership concentration is not monotonic. It hinges on the distribution of ownership. H2: The relation between diversification and managerial shareholding is also non-monotonic. H3: State ownership negatively affects diversification H4: Legal person shares may affect diversification

A Snapshot of Empirical Design and Main Findings Empirical design 1.Two proxies for diversification: number of business units, N; and DT 2.Various measures of ownership structure: largest shareholder’s shareholding, H1; the difference of shareholdings between the largest and the second largest shareholders, H1-H2;state dummy, STATE; Group dummy, GROUP. 3.Chairman/CEO shareholding, INSIDE  the largest shareholders’ shareholding on N  Managerial shareholdings on N  State shares on N  Legal person shares on N  Firm value and diversification Main findings Use the panel data from the Chinese listed firms. Sort the sample into three sub-samples based on H1. Multivariate regressions are applied to the three-sub- samples separately. N, DT, and Tobin’s q are used as dependent variables

Overall Comments  This paper attacks an interesting issue – how ownership structure affects a firm’s diversification strategy and subsequent performance  The author offers preliminary findings showing that ownership structure is very important in understanding the diversification strategies among the Chinese listed firms  However, pitfalls in empirical design limit the paper’s incremental contribution, which I will elaborate on next slides.

Some Specific Comments About the research questions  The hypotheses to be tested are not very clear. The whole story is based on the assumption that diversification reflects either managerial agency problems or largest shareholders’ tunnelling, which however might not be true.  Hypotheses 2-3 are quite ad hoc, later empirical support is also weak.  The causal relation between diversification and ownership structure is not that straightforward, at least to me. The paper clearly argues that ownership structure causes diversification, but the reverse might be true as well. Further evidence and more discussions should be provided.  The author should elaborate more on the theoretical foundations and the testable hypothesis  The causal relation between diversification and ownership is not straightforward. Thus, ownership might be an endogenous variable.  I am not sure how much N and ownership structure change across time, therefore, the value of using panel data is limited.  Timing issue. Should the author use ownership of last year to explain diversification in the current year?  Using H1 to sort the sample also sounds ad hoc. Why don’t you just use the whole sample?  You should also control for profitability, and capital investment in all regressions.  I guess a less controversial way to specify the model is to use a probit type of model. The dependent variable is a dummy indicator showing whether a firm increases its number of units, and the independent variables include the changes in shareholdings.  I did not see any value associated with Table 4- 7, where Tobin’s Q is used as the dependent variable About the research design

Minor Issues 1.The tables should be self-explanatory. The current format is quite hard to follow. 2.The paper contains quite a few overstatements. For example, audience can not draw any inference from your empirical results about managerial shareholding and legal person shares. 3.Quite some papers cited in the paper are missing in the reference; some papers raised in the reference are not cited in the paper

Thanks