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Journal of Zhejiang University SCIENCE A 2005 Vol.6 No.4 P.329-333


Diversification or splitting-an explanation based on Contract Theory

Author(s):  LUO Liang-zhong, SHI Zhan-zhong

Affiliation(s):  School of Management, Shanghai Jiaotong University, Shanghai 200052, China

Corresponding email(s):   mountaintopsnow@hotmail.com, hilltopnow@163.com

Key Words:  Diversification, Specialization, Divestment, Contract Theory

LUO Liang-zhong, SHI Zhan-zhong. Diversification or splitting-an explanation based on Contract Theory[J]. Journal of Zhejiang University Science A, 2005, 6(4): 329-333.

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By inserting the variable of the exactness of corporate valuation into the classic model of contract Theory, this paper, on the bases of the interaction of the variables of the veraciousness of corporate valuation, managerial incentives and operational risks, explores the deep-seated reasons for changes in corporate structures, and draws the conclusion that the divestment of the subsidiary is beneficial to shareholders when the parent corporate is undervalued and that the relation between the parent and the subsidiary is disordered, or vice versa. This conclusion is consistent with the motives of many divestiture cases in reality.

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[6] Stiglitz, J., 1986. Theory of Competition, Incentive and Risk. In: Stiglitz, J., Mathewson, G.F. (Eds.), New Developments in the Analysis of Market Structure. MIT Press, Cambridge.

[7] Williamson, O., 1975. Markets and Hierarchies: Analysis and Antitrust Implications. Free Press, New York.

[8] Zhang, W.Y., 1996. Game Theory and Information Economics. Shanghai Sanlian Publishing House and Shanghai People’s Press, Shanghai, China (in Chinese).

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