The Reasons of Diversification Discount

In this paper, we have analyzed the reasons of diversification discount. The investigation has been performed using panel data procedure for a sample of 320 Chinese companies listed on Shanghai Stock Exchange over the span from 2001 to 2006. We find that diversification discount have two main reasons. One is the high agency cost, the other is the cost inefficiency. So, for Chinese listed companies, we suggest that the implementation of the diversification strategy should be cautious.