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| Author: | Raynor, M. E. |
| Title: | Diversification as Real Options and The Implications on Firm-Specific Risk and Performance |
| Journal: | Engineering Economist
2002 : VOL. 47:4, p. 371-389 |
| Index terms: | COMPANIES DIVERSIFICATION OPTIONS RISK ANALYSIS PERFORMANCE MEASUREMENT |
| Language: | eng |
| Abstract: | The management literature posits that firms can create value through diversification. In contrast, the established finance literature concludes that diversified firms destroy value. This paper suggests a way to reconcile these two warring camps by articulating a new theory of the way in which diversification can add value not by increasing performance, but by reducing risk in ways that investors cannot replicate. Specifically, diversification, understood dynamically, provides a way for companies competing in especially turbulent industries to hedge the competitive risk attendant to "convergence" phenomena. That is, in industries where the optimal operating scope of a firm is in question because the promise of convergence cannot be exploited using market-mediating mechanisms. |
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