Diversification strategies and corporate financial distress: the impact of monetary tightening and IPO timing

• Main Author: ZHANG, Yingcen
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2024
• Subjects: diversification strategies; monetary tightening; financial distress; China; listed companies; Business Administration, Management, and Operations; Corporate Finance; Strategic Management Policy
• Online Access: https://ink.library.smu.edu.sg/etd_coll/549; https://ink.library.smu.edu.sg/context/etd_coll/article/1547/viewcontent/GPBA_AY2018_DBA_Zhang_Yingcen.pdf
• Institution: Singapore Management University

Diversification as a strategic objective has become increasingly pursued by many enterprises. However, whether diversification truly brings robust business operations and risk dispersion effects remains a focal point of attention in both academic and practical realms. This study, grounded in Chinese practice, empirically examines the relationship between corporate diversification and financial distress and further discusses the interactive impact of monetary policy tightening and diversification on corporate financial distress. Empirical analysis results indicate a positive correlation between corporate diversification and financial distress in China. This finding suggests that diversification may not always confer the advantage of risk dispersion to enterprises; it could increase financial distress instead. Additionally, empirical results demonstrate that tightening monetary policy has a significant positive effect on corporate financial distress. This outcome remains robust even after changing variables and models. Mediation effect tests indicate that diversification leads to financial distress by reducing corporate cash holdings. This study further focuses on other potential internal and external factors that may influence the relationship between diversification and financial distress. The results show that internal controls, financing constraints, and the quality of external auditing significantly influence the relationship between diversification and financial distress. Specifically, diversification and monetary policy tightening impact on financial distress is particularly pronounced in companies with higher internal control quality, more significant financing constraints, and poorer external audit quality. This study further analyzes the moderating effect of a company's Initial Public Offering (IPO) timing on the relationship between diversification and financial distress. The analysis finds that newly listed companies in the initial period after IPO, due to positive market responses, lower financing costs, and new investment opportunities, may face higher financial distress from diversification activities. Conversely, companies listed longer and in a more stable maturity phase can significantly reduce their financial distress through diversification strategies. This result indicates that the effects of diversification strategies vary for companies at different developmental stages. This research reveals that diversification strategies may not always be the best choice for enterprises in specific macroeconomic and internal environments. When considering expanding their business scope, enterprises need to assess national monetary policies, internal control systems, financing status, and other relevant factors to ensure that their strategic decisions bring long-term value to the organization. This study provides new insights into the relationship between corporate diversification strategies and financial distress for the academic community. It offers valuable strategic decision-making references for the practical realm, aiding enterprises in making wiser decisions in a complex and dynamic market environment.