Intervention of Governance Entities in Business Diversification of Chinese Airlines

Chinese airlines commonly adopt diversification strategies to cope with market fluctuations; however, excessive diversification can also increase the financial risks of firms. Managers, shareholders, creditors, and the government, as governance entities, play decisive roles in corporate diversification strategies. An investigation into how these governance entities influence corporate diversifed expansion is important to understand the causes of overdiversification of Chinese airlines and to find effective countermeasures. Based on the data of seven airlines from 2015 to 2020, it finds that managers’ overconfidence in business conditions and profitability will promote airline expansion in non-airline businesses, which is an important cause of airline overdiversification; while government intervention can effectively inhibit the effect of managers’ overconfidence in diversifed expansion. Therefore, to address the problem of overdiversification caused by managers’ overconfidence, it is necessary to strengthen the government’s regulation on and intervention in airline business.