Diversification and Corporate Performance

China's energy industry plays an important role in China's economic, social, and environmental development. First, China's energy industry, which includes national strategic and pillar industries, is responsible for domestic energy supply and is closely connected to the Chinese national economy. Energy supply conditions directly affect the sustainable development of the Chinese macro economy. Meanwhile, China's energy companies experience a high degree of government intervention and must assume more political responsibility for economic development, livelihood improvement, and environmental conservation. Furthermore, by the end of 2015, the total value of China's listed energy companies accounted for roughly 10% of the value of China's A share market, and many energy stocks are also component stocks of stock indices. Fluctuations in China's energy stock prices will dramatically affect the overall stability of China's stock market. In addition, the development of renewable and clean energy in the energy industry furthers ecological sustainability in China by reducing carbon emissions and mitigating environmental deterioration. It follows that China's energy companies significantly shape the sustainable development of China's economy, society, and environment.

However, since 2011, Chinese economic growth has slowed as China has entered the "new normal" economy. As the Chinese government implements a series of policies to optimize domestic production capacity and inventory, China's domestic energy demand continues to decline. Meanwhile, the performance of China's energy firms continues to decline due to low domestic energy demand. Given the significance of the developing predicament faced by China's energy companies, it is now essential to identify ways to improve the corporate performance of these companies efficiently. Furthermore, corporate business strategies are some of the most direct and appreciable factors that can affect corporate performance. Corporate business strategies can be adjusted to affect corporate performance through the development of business philosophies, organization structures, and product portfolios. This paper thus outlines ways to improve the performance of China's energy companies. More specifically, from relevant data available and on the basis of theories and previous studies, the paper investigates correlations between corporate business strategies and the performance of China's listed energy companies.

From relevant data available and on the basis of theories and previous studies, the paper explores corporate business strategies involving industrial and international diversification.

In relevant studies, most scholars declare that industrial diversification can decrease corporate value. Previous studies on the negative effects of industrial diversification take Tobin's Q as a proxy for corporate value. Previous studies mainly interpret the negative effects of industrial diversification based on agency theory, internal capital markets, and market microstructures. According to agency theory, managers do not have access to companies' residual claims, and so, managers can make decisions that damage corporate value to improve their own utility. In such cases, managers have the incentive to diversify to reduce idiosyncratic risks and to seek private benefits. In general, managers can manage large companies to increase their compensation. Industrial diversification enhances managers' abilities to disperse risks and increases their value to companies. This creates the following outcome: managers that continue to insist on industrial diversification strategies though industrial diversification will undermine the financial positioning of the company's shareholders. In reference to the internal capital market, some scholars believe that industrial diversification could lead to inefficient resource allocation between different departments within companies [. Relevant studies verify two reasons for the formation of inefficient internal capital markets in industrial diversified companies. On the one hand, driven by a need for power, executives can diversify their investments excessively through resource allocation, so that industrial diversification can result in the distortion of resource allocation in the company's internal capital market; on the other hand, by dispersing company capital and efforts, industrial diversification can decelerate company operation responses to new external investment opportunities. Thus, diversified industrial companies are less sensitive to investment opportunities than specialized companies. In reference to market microstructures, relevant studies focus on the interpretation of the negative effects of industrial diversification in accordance with information economics. In a capital market, the stock prices of specialized companies reflect companies' real operation conditions better than those of industrial diversified companies. More information on operation conditions increases manager investment efficiency and reduces information asymmetries between companies and investors. Stock prices can bring managers valuable information so that insufficient information resulting from industrial diversification can result in corporate value loss. Industrial diversification can result in low investment efficiency as a result of company capital and effort dispersal.

However, other studies show that industrial diversification can improve corporate performance. In reference to the theory of internal capital markets, some scholars explain that industrial diversification can effectively alleviate companies' external financing constraints and insufficient funds by forming efficient internal capital markets. When a company has an efficient internal capital market, managers can bring idle capital to sectors in need of capital by adjusting internal capital allocation schemes. Efficient internal capital markets can improve corporate performance by investing more funds in projects with positive present value and high returns, resulting in efficient corporate operations. In reference to the capital market, studies find that industrial diversification can create companies with high excess stock returns. Maksimovic and Phillips (2002) find that diversified industrial companies can optimally allocate resources across segments based on the relative efficiency of divisions. Some other studies also show that industrial diversification can increase corporate value and productivity. In practice, the benefits of tax saving from industrial diversification are ubiquitous in diversified industrial companies.

In addition, over the last decade, some scholars have explained that previous relevant studies fail to take industrial heterogeneity into consideration. Santalo and Becerra (2008) declare that whether industrial diversification will deteriorate company performance is dependent on competitive industrial environments. Due to lock-up problems, industrial diversification damages corporate performance

when specialized companies dominate an industry and vice versa. Meanwhile, other studies show that some factors affect correlations between industrial diversification and corporate performance. Currently, more and more scholars are focusing on the effects of executives' characteristics on the relationship between corporate performance and business strategies. According to human capital theory, executive cognition, skills, and preferences vary considerably due to differences in education background, gender, and social connection. These differences ultimately affect corporate performance by influencing executives' strategic decisions.

There are few empirical studies on correlations between international diversification and corporate performance. According to existing studies, however, international diversification is also a two-edged sword. On the one hand, when huge opportunity costs are associated with industrial diversification, opportunity costs are very low or even zero when core technologies are used in new markets. At the same time, companies can gain more from differences in product prices, markets, and tax policies between different countries. Furthermore, investors always give priority to diverse international portfolios. On the other hand, international diversification can also deteriorate corporate performance due to the limited efficiency of internal capital markets, agency problems, and an increase in management complexities. In addition, some studies show that the effects of international diversification on corporate performance also depend on company characteristics (e.g., size, capital structure, and corporate governance).

On methodology, relevant studies have reviewed a hundred years of methods from theoretical research to survey and empirical research. In earlier stages, relevant theories (e.g., on economies of scope and agency) were developed to explain correlations between corporate performance and business strategies. Later, some scholars began to verify the accuracy of these theories by surveying companies. With the rapid development of econometry and information disclosure, several empirical studies were conducted by econometry to validate general rules in practice. Currently, large amounts of data and econometric methods are applied in empirical studies to solve complex problems (e.g., endogeneity). However, the mechanism and evidence on the effects of industrial and international diversification are far from conclusive.

On the whole, the development of relevant studies of China is far behind that of the United States and Europe. Relevant studies on China mainly focus on the correlation between diversification and corporate performance for all listed companies. Most of these studies show that diversification can damage corporate value or performance. Other studies on other factors affecting the linkage between corporate performance and business strategy focus on ownership structures. However, few studies have taken industrial heterogeneity and human capital into consideration. With respect to the important role of China's energy companies in China's economy and capital market, it is important to investigate the correlation between industrial strategies and the two corporate business strategies employed in China's listed energy companies. This paper's results could provide China's energy companies with scientific guidance on the proper selection of sustainable business strategies. The efficient operation of China's energy companies can also help ensure the sustainable development of China's energy industry, macro economy, society, and environment.

The remainder of the paper is organized as follows. Section 2 gives a brief explanation of the analytical logic applied. Section 3 introduces the model and data used. Section 4 presents the study results and relevant interpretations. Section 5 discusses study implications, and the final section provides a conclusion.