CEO characteristics and the diversification discount: Evidence from Chinese listed firms

Abstract

This paper examines corporate diversification as a managerial choice rather than only a firm-level outcome. Using a panel of Chinese A-share listed firms from 2009 to 2020, we study whether chief executive officer (CEO) characteristics help explain the propensity to diversify, the type of diversification pursued, and its valuation consequences. Baseline regressions show that diversification intensity is negatively associated with both operating performance and market valuation, with the raw performance gap concentrated among unrelated diversifiers. CEO characteristics help explain diversification choices. Older CEOs are less likely to initiate diversification, while CEOs with a financial background are more likely to pursue unrelated diversification. We then compare a conventional firm-level Heckman selection model with a CEO-augmented model that includes CEO traits in the first-stage diversification equation. In the conventional model, the estimated diversification discount becomes weak after selection correction. When CEO traits enter the first stage, however, the discount in Tobin’s Q re-emerges. The results suggest that selection-corrected estimates of the diversification discount depend not only on whether selection is addressed, but also on how the diversification choice is modeled.