Diversification by Securities Firms

Abstract

Abstract The securities firms that have survived and grown over the past twenty years have altered and adapted their organizational forms to respond to changing economic conditions, by diversifying into new lines of business. Because there have been various motives for these diversifications, various economic models are helpful in exploring these motives. Teece (1980, 1982) shows the advantages of using firm know-how across several lines of business; Williamson (1975) argues that diversification is a method of employing excess capital; Chandler (1969) discusses the ability of a technical staff to find and develop diversification opportunities; Amit and Livnat (1988) consider the risk-reduction benefits of diversification; and Levy and Haber (1986) believe that diversification provides benefits in organizational flexibility and bankruptcy protection. We also will discuss the efficacy of the various entry modes (Hill, Hwang, and Kim 1990) that have been used by securities firms to enter a new line of business. Then we will examine the conditions that have led to or facilitated diversifications. An important argument of this book is that successful diversification is necessary for securities firms to maintain or improve their relative position in their industry.