Vertical or horizontal: optimal integration strategy under separation of ownership and control

Abstract

This study proposes a framework to analyze the strategic value of integration, when separation of ownership and control is considered. According to this framework, we investigate the optimal integration strategy in different control distribution and discuss how external market influences the best strategic choice. Beside theoretical analysis, we also provide evidence from Chinese listed firms to validate our research. The key results of our study show that first, unintegrated strategy works best, if the level of control-ownership disparity is extremely high. Second, in general, vertical strategy is more appropriate for substitute markets, while horizontal strategy may bring more benefits in a highly complementary market. Third, the impact of integration strategy on a firm’s performance is negatively moderated by control-ownership disparity. However, this moderate effect may be weakened by market structure. Our results provide a new and comprehensive perspective for understanding the inconsistent results from previous studies. Moreover, the analysis in this study also highlights a firm’s strategic decision and market regulation policy.