Abstract
This paper examines the moderating impact of state ownership and group control mechanisms on the relationship between diversification and performance of companies affiliated with large business groups in China. We find that the state ownership has enhanced the performance of group affiliated companies when they adopted higher degrees of diversification. We also find that cash flow rights have a positive impact on the performance of companies with lower degrees of diversification while in general group control rights have a negative impact on the performance. These results suggest that a group’s control mechanisms, derived from pyramid ownership structures, enable the dominant owners to expropriate the value from minority shareholders or tunnel corporate resources for their own interest.
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