Costs Of Diversification Research Articles

MONGOLIA IN INTERNATIONAL FINANCIAL AND LOGISTICS CHAINS

The article is devoted to the methodological and practical aspects of assessing the specifics of developing countries, including Mongolia, in estimate of the performance of financial and logistics chains. The relevance and significance of the study is that decisions on the investment program (Vision 2050) are made on the basis of traditional assessments of investment projects, its’ economic and social effects. Based on a generalization of available information and data, the article presents the author’s approach to justifying the need to change traditional assessment methods. The necessity of taking into account in models the costs of diversification and forecasting changes in the place in value chains when implicit costs arise in the future has been proven. Ignoring the fact that the costs of international trade are passed on to consumers in small commodity economies often leads to recessions and the need for constant debt refinancing. The article examines the structure of Mongolia’s exports and imports not in traditional estimates, but from the position of influence on future growth of expenses in the absence of sources to cover them. Particular attention is paid to the growing inefficiency and irrationality of budget expenditures in the traditional forecasting of the effects and benefits from the implementation of the project. In relation to the research topic, the use of the terms «budget liquidity», «fictitious financial flows», «disguise of commodity flows» is justified. An approach to the classification of factors that distort the picture of the movement of financial and logistics flows from the point of view of influence on national economic interests is proposed. In conclusion, a conclusion is drawn about the possibility of practical application of the proposed approaches for the analysis of financial and logistics flows of other countries, as well as the existing assumptions in the application of this model.

Optimal multivariate financial decision making

Agents who pursue optimal portfolio choice by optimizing a univariate objective (e.g., an expected utility) obtain optimal payoffs that are increasing with each other (situation of no diversification). This situation may lead to an undesirable level of systemic risk for society. A regulator may consider a global perspective and aim to enforce diversification among the various portfolios by optimizing a suitable multivariate objective. We explain that optimal solutions satisfy a notion of multivariate cost-efficiency and provide an algorithm to obtain multivariate cost-efficient payoffs.We also assess the cost of diversification and provide the strategy that the regulator should pursue for obtaining the desired level of diversification.

The Role of the Board in Unrelated Diversifications: Evidence from an Acquisition Wave in China

Unrelated diversifications are generally more viable in underdeveloped institutional environments because internal markets within the diversified firm can substitute the inefficient external ones. Using a sample of 498 major acquisitions undertaken during an acquisition wave by Chinese listed firms, we find acquiring a target firm in an entirely different industry can cause more severe goodwill impairment losses in the following two to four years, which indicates that acquirer managers tend to overestimate the synergistic gains they could realize in unrelated diversifications. Moreover, a capable board of directors can provide information advantages through outside directorship ties, structural hole position in the interlock network, and specialized committees, thus limit managers to make value-destroying diversification decisions. Further analysis suggests investors tend to prefer such unrelated acquisitions during the acquisition wave, indicating that shareholder expectations drive managers to diversify. By examining the role of boards as information conduits and advice-providers in limiting the cost of diversification in an underdeveloped institutional environment, this study contributes to the literature on diversification, acquisition and corporate governance.

An Empirical Study on the Influence of Diversification on the Operating Cost of Commercial Banks

The majority of the literature has focused on the impact of diversification on bank performance, while the research on the impact of diversification on bank costs is inadequate. Therefore, in this paper we empirically analyzed the impact of diversification on operating costs through a panel regression model, collecting the data of 47 Chinese commercial banks from 2005 to 2015. The empirical results showed that an increase in the non-interest income ratio significantly promoted a decrease in the cost–income ratio, and the robustness tests of different time intervals and different types of banks were consistent. This suggests that diversification effectively reduced the operating costs of banks by means of the sharing of information and equipment, the reduction of asset specificity, and the improvement of operation management synergy. This also indicates that excessive competition costs and the agency costs of diversification were lower. Further analysis showed that the diversification of national banks compared with local banks was more significant in reducing operating costs, and, for the national banks, the effects of economies of scope and scale were stronger. Diversified management strategies for local banks should be carefully promoted through the construction of strategic alliances, mergers and acquisitions, etc.

The cost of diversification over time, and a simple way to improve target-date funds

Diversification across time means changing the asset allocation over time. We show that under mild conditions diversification across time is inferior for all risk-averters and for all investment horizons, relative to a portfolio with the same average asset allocation, held constant over time. Target-date funds help reduce the variation in the asset allocation throughout the lifecycle, by implicitly considering the reduction in human capital with age. However, their structure implies two systematic deviations from constant asset allocation. We suggest a simple correction leading to a typical increase of 5%-22% in welfare.

Saving Active Managers from the Market

Assets are leaving actively managed mutual funds at an unprecedented rate as investors have come to perceive that active management does not deliver value. Investor disappointment is generally attributed to the high fees and poor relative performance of the class, yet there is a deeper systemic issue at work. In the first part of this paper I argue that portfolio managers are unable to deliver value to investors because they generally do not consider the alpha-diluting opportunity costs of diversification (defined later) when constructing and managing their portfolios. In the second part of the paper I propose the introduction of a fund of concentrated fund (FoCF) structure that would allow investors to minimize the costs of diversification and capture significantly more alpha without compromising their ability to manage risk.

The impact of diversification on task performance: Evidence from kidney transplant centers

AbstractResearch SummaryEven when diversification is beneficial, entry into a new business can negatively affect the performance of the firm's existing business(es). We examine transplant centers that diversified from kidney transplants into liver transplants, focusing on how patient age can affect the costs associated with diversification. We find that diversification into liver transplants resulted in worsened quality performance in kidney transplants for younger patients, whose cases were less likely to be unexpectedly complex. For older patients, whose cases were more likely to have complications, the negative effect of diversification was offset. Our findings suggest that in health care the costs of diversification can be sensitive to patient characteristics, making focused organizations desirable when task complexity is low, while favoring diversified organizations for more complex tasks.Managerial SummaryWhen firms diversify into new activities, the increased coordination may worsen performance in their original, prediversification activities. We show how this change in performance depends on the characteristics of the work itself. We examine kidney transplant centers that diversified into liver transplants. Young patients, who are typically less complex to treat, had worse outcomes when centers diversified. However, for the oldest patients—generally the most complex to treat, with the greatest chance of complications—diversification was associated with slightly improved performance. This suggests that while coordination is difficult, organizations that diversify may be able to acquire coordination skills that can be applied to more complex tasks. Simpler tasks are unlikely to benefit from these skills, and thus we find worsened performance in these tasks after diversification.

Pastoral community coping and adaptation strategies to manage household food insecurity consequent to climatic hazards in the cattle corridor of Uganda

ABSTRACTEstablishing short and long term measures that pastoral and agropastoral households use to ensure they have access to food in periods of climate extremes could provide insights into ways to support households in similar conditions. Using semi-structured elicitation, 15 purposively selected participants from case households and 13 community leaders, in the central cattle corridor of Uganda were interviewed in January to February 2013. Thematic analysis revealed four coping strategies: harvesting immature food crops, selling off cattle, searching for alternative water sources and using alternative non-production-based means to access food. Three adaptation strategies identified were: diversifying livelihood activities, changing agricultural practices and investing in alternative water sources. Several strategies were related to incremental crop system changes, to maintain the existing way of practice. However, some were transformational, like formerly specialized livestock keepers taking on crop farming. Some strategies presented environmentally erosive effects; which could be curbed by evaluating the opportunity cost of diversification and transformative practices in relation to incremental adaptation. Insights gleaned could assist researchers to consider aspects for in-depth adaptation analysis and inform on how policies and institutions in Uganda could be used to facilitate, rather than undermine, pastoralists’ coping and adaptation; and thus guide interventions to strengthen food security.

When panic makes you blind: A chaotic route to systemic risk

We present an analytical model to study the role of expectation feedbacks and overlapping portfolios on systemic stability of financial systems. Building on Corsi et al. (2016), we model a set of financial institutions having Value-at-Risk capital requirements and investing in a portfolio of risky assets, whose prices evolve stochastically in time and are endogenously driven by the trading decisions of financial institutions. Assuming that they use adaptive expectations of risk, we show that the evolution of the system is described by a slow-fast random dynamical system, which can be studied analytically in some regimes. The model shows how the risk expectations play a central role in determining the systemic stability of the financial system and how wrong risk expectations may create panic-induced reduction or over-optimistic expansion of balance sheets. Specifically, when investors are myopic in estimating the risk, the fixed point equilibrium of the system breaks into leverage cycles and financial variables display a bifurcation cascade eventually leading to chaos. We discuss the role of financial policy and the effects of some market frictions, as the cost of diversification and financial transaction taxes, in determining the stability of the system in the presence of adaptive expectations of risk.

The impact of within-industry diversification on firm performance

PurposeThe purpose of this paper is to investigate how within-industry diversification affects the financial performance of small- and medium-sized enterprises (SMEs) in emerging markets (EMs). The authors draw on both the resource-based view and the institutional perspective and argue that within-industry diversification can enhance the financial performance of SMEs in EMs. Due to institutional voids in emerging economies, SMEs can gain additional benefits from scope economies, as well as from market returns, by filling product market voids and gaps in business ecosystems, while also enjoying low input and labor costs that reduce the coordination costs of diversification. This, in turn, enhances benefits of within-industry diversification, thereby resulting in higher financial profitability.Design/methodology/approachThis study employs panel data econometrics to estimate the model. The authors test hypotheses on 195 firms, originating from five countries in Southeast Asia, during the period of 2009–2014.FindingsThe empirical results support the arguments. Within-industry diversification has a positive impact on the performance of SMEs in EMs. These effects become weaker when the institutional contexts are more developed. Nevertheless, such effects become stronger when SMEs in EMs are more efficient.Research limitations/implicationsThe relationship between within-industry diversification and performance is a positive linear pattern, which differs from the pattern in advanced economies. In addition to unrelated diversification, the related diversification is preferable for firms in EMs.Practical implicationsThe paper provides implications for SMEs that aim to enhance their performance by engaging in single product lines and within-industry diversification.Originality/valueThis paper examines the different ways within-industry diversification can enhance SMEs performance in EM contexts.

Bullish or Foolish? Collective Expectations and Diversification in the Venture Capital Industry

We examine how collective expectations affect firm diversification behavior in the U.S. venture capital (VC) industry. Departing from prior accounts that focus on potential benefits and costs of diversification, we theorize how elevated collective expectations–signaled by trends in the broader environment, such as initial public offering (IPO) activities–encourage firms to venture into new industries, resulting in higher levels of diversification. However, not all firms are equally likely to diversify during a boom. We predict why some firms are more susceptible than others based on two theoretical approaches to social influence. The rational-actor account suggests that a firm’s tendency to diversify during the boom will be contained by its experience; whereas the embedded-actor account suggests that this tendency is moderated by a firm’s immediate network and the local community. We further posit that a firm’s diversification behavior during the boom will lead to a subsequent worse performance. We test these predictions with all U.S.-based VC investments from 1990 to 2016. Results support our arguments that firms tend to diversify during a boom and that doing so has negative performance implications. Moreover, our findings lend stronger support for the embedded-actor account compared to the rational-actor account.

Trading Your Diversification Strategy for a Green One: How Do Firms in Emerging Economies Get on the Green Train?

Many studies have been performed to explore how firms transform from a nongreen strategy to a green one, but there is no definitive answer. Aiming to untangle this complex process in the context of the strategy and belief that being green is an important endeavor, this study details how firms implement green strategy from product diversification to innovation under the pressure of environmental regulations. Consistent with our arguments, data from Chinese listed firms reveal that environmental regulations create pressure for resources and managerial skills to be split between diversification and innovation strategies, which leads to innovation at the cost of diversification. This tension is strengthened when the firm has insufficient slack resources and faces strong environmental dynamism. Furthermore, we find that the innovation strategy increasingly substitutes the loss of the downsized diversification strategy. In addition, these effects show the differences between sectors and the dynamic change over time.

When Panic Makes You Blind: A Chaotic Route to Systemic Risk

We present an analytical model to study the role of expectation feedbacks and overlapping portfolios on systemic stability of financial systems. Building on [Corsi et al., 2016], we model a set of financial institutions having Value at Risk capital requirements and investing in a portfolio of risky assets, whose prices evolves stochastically in time and are endogenously driven by the trading decisions of financial institutions. Assuming that they use adaptive expectations of risk, we show that the evolution of the system is described by a slow-fast random dynamical system, which can be studied analytically in some regimes. The model shows how the risk expectations play a central role in determining the systemic stability of the financial system and how wrong risk expectations may create panic-induced reduction or over-optimistic expansion of balance sheets. Specifically, when investors are myopic in estimating the risk, the fixed point equilibrium of the system breaks into leverage cycles and financial variables display a bifurcation cascade eventually leading to chaos. We discuss the role of financial policy and the effects of some market frictions, as the cost of diversification and financial transaction taxes, in determining the stability of the system in the presence of adaptive expectations of risk.

Cui bono? An empirical investigation into risk benefits of corporate diversification

While the diversification–performance link is well covered in strategy research, we know much less about the link between firm diversification and risk. This article draws from modern portfolio theory and corporate diversification theory to derive a comprehensive set of hypotheses on the impact of related and unrelated diversification on the systematic risk, total risk, and bankruptcy risk of a firm. Based on a large international sample, we find the portfolio effect to be more important than previously thought, while synergy effects appear to be largely counterbalanced by the direct and indirect costs of diversification. Specifically, we find that systematic risk is not reduced by corporate diversification, while bankruptcy risk is significantly lower in diversified firms, possibly leading to conflicts between shareholders and other stakeholder groups.

Saving Active Management from the Market

Assets are leaving actively managed mutual funds at an unprecedented rate as investors have come to perceive that active management does not deliver value. Investor disappointment is generally attributed to the high fees and poor relative performance of the class, yet there is a deeper systemic issue at work. In the first part of this paper I argue that portfolio managers are unable to deliver value to investors because they generally do not consider the alpha-diluting opportunity costs of diversification (defined later) when constructing and managing their portfolios. In the second part of the paper I propose the introduction of a fund of concentrated fund (FoCF) structure that would allow investors to minimize the costs of diversification and capture significantly more alpha without compromising their ability to manage risk.

Attitude of bank credit managers and analysts towards firm diversification in Mozambique

PurposeThe purpose of this paper is to survey bank credit managers and analysts in Mozambique regarding their attitude toward firm diversification.Design/methodology/approachForty-five credit managers and analysts from 23 banks in Mozambique were surveyed about their views on diversification and diversified firms. Questionnaires were used. Data were analyzed using chi-square test and binomial test.FindingsCredit analysts and managers in Mozambique have a generally positive attitude toward diversification. This is mainly due to the coinsurance effects and stability of cash flows that diversification could provide. They, however, prefer moderately diversified to highly diversified firms and related to unrelated diversified firms. This is a puzzle, given the expectation that greater unrelated diversification is better able to provide coinsurance.Practical implicationsThe study provides information that is useful for understanding the diversification–cost of capital relationship and could help corporate managers in making capital structure decisions.Originality/valuePrevious researchers have not studied the attitude of credit managers/analysts toward diversification in Mozambique using the survey approach. The study contributes to the literature on diversification and access to external finance, the diversification discount and cash holding behavior of firms.

Analyzing Cloud-based Startups: Evidence from a Case Study in Italy

The aim of this study is to analyze the reasons behind the adoption of cloud computing and its implementation process in startup firms as well as to verify the advantages and disadvantages deriving from the adoption of this tool and how it could increase entrepreneurial activities. We applied a research framework developed by previous scholars on cloud adoption within SMEs in an attempt to adapt it to startup firms. In particular, we conducted a case study in an Italian technological startup.Our results show that cloud technology supports and facilitates entrepreneurial activity, especially reducing several entry barriers for new entrepreneurs. This study contributes to the existing literature on cloud computing, and it has several managerial implications. First, it shows that setting up the organizational model on cloud computing allows entrepreneurs to reduce organizational efforts and ICT investments. Furthermore, this technology can reduce diversification costs by eliminating entry barriers, thus opening new markets and opportunities for entrepreneurs.

Western-Southern Enterprise

Examines the problem facing Western Southern Enterprise (WSE), a mutual insurance company, at the end of 1996. Its investment in Cincinnati Bell stock was phenomenally successful, but left the company potentially overweighted in equities in general and a single stock in particular. The cost of diversification is declaring and paying tax on a large capital gain. Possible solutions include maintaining the position, selling the position, or protecting the position by issuing a Debt Exchangeable for Common Stock security (DECS). Asks students to trade off the benefits of diversification (which they have to justify) against the cost of declaring the capital gain (which they must quantify). In defending their choices, students are asked to evaluate the various tax and nontax benefits and costs of each solution. Because the client (WSE) has several potentially contradictory objectives, the case lays out a situation where security design can improve upon the simple alternatives. Provides structuring details of the DECS, allowing discussion of why various features were included in their design.To discuss the costs of financial distress (or poor diversification) as well as teach security design.

Indigenous Practices for Climate Change Adaptation among Rural Households in Imo State, Nigeria

Climate change has been described as among the major challenges of the twenty-first century. However, this trend cannot be completely halted but can only be slowed down through the development and adoption of adaptation practices especially among the rural people whose major source of livelihood is agriculture which is at stake. This paper examined the indigenous practices for climate change adaptation among rural households in Imo State. A multistage sampling procedure was used to select the sample. A total of 108 respondents were used for the study. Descriptive statistics were used in analyzing the data obtained from the study. Results show that a majority (78.3%) of the respondents were aware of climate change while about 40.6% knew a very little about it. The result also shows that the most effective local adaptation practices to climate change in the study area included growing drought-resistant crop varieties (M = 1.14), planting deeper into the soil to avoid heat stress (M = 1.10), increased weeding ( M = 1.29) and changing the timing of land preparation (M = 1.10). Further, the results show that major constraints to Original Research Article Umunakwe et al.; BJAST, 8(1): 67-79, 2015; Article no.BJAST.2015.187 68 adaptation to climate change in the study area included limited access to improved crop varieties (M = 1.95), high cost of farm labour (M = 1.80), inadequate financial resources to adapt (M = 1.80) and high cost of diversification of enterprise (M = 1.78). The paper recommends the massive involvement of the extension agency and the mass media in climate change adaptation programmes so as to raise the awareness of people on the subject and thus increase their adaptive

The cost or benefit of socially responsible investment

This paper takes as its starting-point the traditionalTreynor and Mazuy timing model and its conditionalversion and adapts them so as to be able to distinguishbetween the stock picking and Market timing abilities ofethical and conventional fund managers. SevenEuropean countries are analysed and similar results arefound for each country. In general, perverse stockpicking and Market timing abilities are observed forconventional fund managers. With regard to ethical fundmanagers, we find they manage to match theirbenchmark both when it outperforms or underperformsthe conventional benchmark. Furthermore in some casesa positive stock picking ability is found for ethical funds.The more restrictive the definition of the term ethicalfund, the greater the cost of diversification for ethicalmanagers. Moreover for best-in-class funds a negativestock picking ability is registered, and in relation withMarket timing, we find that they are more influenced bytheir benchmark than the rest of the ethical funds.