Corporate Strategy Diversification - Prof. Dr. Bernd Venohr

Theory of unrelated diversification:
Why an internal capital market can be more efficient
than the external capital market?
� Create value by exploiting financial economies: large organizations
can fund projects more quickly and economically than external market
– small projects are bundled
– large projects can be taken on
– key challenge :find products and markets that provide negatively
correlated cash flows
� Reduce funding costs through superior financial resource allocation:
internal capital market is like a debt market with all the benefits of
equity ownership
– resolve borrower-lender problem (“moral hazard”):
– internal funding allows for information sharing and better control over the
use of funds by the “lender”
– less likely that borrower and lender expropriate each other
Source: Corey Phelps; Mgmt 430
© 2006 Dr. Bernd Venohr
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