Corporate Strategy Diversification - Prof. Dr. Bernd Venohr
Corporate Strategy Diversification - Prof. Dr. Bernd Venohr
Corporate Strategy Diversification - Prof. Dr. Bernd Venohr
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Remarks-Theory of unrelated diversification:<br />
common diversification problems<br />
� Internal capital markets are less efficient than external ones<br />
– Higher quality information not guaranteed<br />
– Individual investors can generally diversify more effectively: combined cash flows<br />
may reduce unique risk (assuming not perfectly correlated) NOT considered a<br />
benefit to outside equity holders; may be “insurance” for employees, customers,<br />
suppliers, debt holders<br />
– Capital allocation can quickly stretch abilities of top managers; additional problem:<br />
escalation of commitment more likely<br />
� Managers’ personal interests drive diversification decision<br />
– Top executives’ compensation often based on “peer companies” (diversify to<br />
increase compensation) : empire building<br />
– When diversification buffers performance it’s harder for top execs to get fired<br />
(Reduce employment risk)<br />
– Poor performance may lead firms to diversify to achieve better returns (“the grass<br />
is always greener…)<br />
Source: Corey Phelps; Mgmt 430<br />
© 2006 <strong>Dr</strong>. <strong>Bernd</strong> <strong>Venohr</strong><br />
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