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| Diversification or splitting-an explanation based on Contract Theory |
| LUO Liang-zhong, SHI Zhan-zhong |
| School of Management, Shanghai Jiaotong University, Shanghai 200052, China |
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Abstract 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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Received: 02 February 2004
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