Many managers believe that the interests of shareholders are best served by
industry diversification. Such may be found in the so-called conglomerates
(chaebol in South Korea; Keiretzu in Japan).
a. Explain why this attitude among managers may exist, and whether there is
some rationale behind it, i.e. from the point of view of the managers of these
companies.
Shareholders interest in buying shares is primarily to earn money. There are
two major extremes to invest in shares. The first way is to invest in risky companies
with high earnings and the other way is to invest in conservative shares
with low earnings. There are a lot of alternatives between these extremes which
balance the risk and the earnings. A mix of different shares will be the best solution
and balance. The discussion about cooperate diversification starts already
in the late 70’s, but until now there are no global accepted ideal results.
With current market understanding and knowledge about the influence of trends
on individual industries an investment in different industries like conglomerates
is rational. Conglomerates with industry diversification can have a balance between
risk and earnings with the potential of better results compared to other
investments. The diversification of risk in each industry makes a balance between
risk and different scenarios possible. Trends in stocks and industries can
not be calculated, but a conglomerate can balance this risk trough the different
industries. [...]
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