Incentives For Diversification Research Articles

Market-Led Reforms as Incentives for Media Change, Development and Diversification in the Baltic States

The arguments in this article are structured around the normative ideal that the function of the news media is to support democratization, to ensure that different opinions are heard and to guarantee freedom of speech. First, the article assesses the relationship between the size of the media market and the official media policies in the three Baltic states. Second, it describes how liberal regulation, ongoing structural changes in the news market and a weak tradition of professional journalism have resulted in a proliferation of market-oriented logic in Lithuania, Latvia and Estonia. Indeed, liberal regulation and existing media policies promote a diversity of media actors as well as content; still, in such a context, new skills are needed by consumers to critically assess available information and make informed choices — in general terms, to be media literate. Finally, this article discusses the challenges of the Baltic media as a new chance to address old problems of professional journalism.

The effect of diversification across businesses and within lending activities on risks of commercial banks' portfolios: evidence from South Korea

This paper investigates the effects of diversification across interest and non-interest activities, as well as, the effects of diversification within lending activities on banks' risk and return measures. Aggregate and panel data from the restructured (after 1997 crisis) banking industry of South Korea for the period 2002-2006 are used. Our results indicate that high level of diversification across interest and non-interest activities, as well as, across broad type of loans (i.e., corporate, household and other loans) is negatively significantly correlated with insolvency risk and positively significantly correlated with risk-adjusted returns, providing evidence for the market-discipline hypothesis. Concerning bank loan portfolio risks, less diversified across industries, loan portfolios are correlated with higher non-performing loan ratio. A shift from manufacture lending towards real estate and lease business lending can reduce the risk of bank loan portfolio. Therefore, bank regulations that focus on stable profitability and bank soundness should provide incentives for diversification.

Fuel mix diversification incentives in liberalized electricity markets: A Mean–Variance Portfolio theory approach

Monte Carlo simulations of gas, coal and nuclear plant investment returns are used as inputs of a Mean–Variance Portfolio optimization to identify optimal base load generation portfolios for large electricity generators in liberalized electricity markets. We study the impact of fuel, electricity, and CO 2 price risks and their degree of correlation on optimal plant portfolios. High degrees of correlation between gas and electricity prices – as observed in most European markets – reduce gas plant risks and make portfolios dominated by gas plant more attractive. Long-term power purchase contracts and/or a lower cost of capital can rebalance optimal portfolios towards more diversified portfolios with larger shares of nuclear and coal plants.

The effect of financial hedging on the incentives for corporate diversification: The role of stakeholder firm-specific investments

Financial hedging and corporate diversification are often considered substitutive means of risk management, implying that rapid development of financial hedging markets will yield less need for firms to manage risk through costly diversification. Building on a stakeholder-based view of risk management, we show that financial hedging and corporate diversification are more often complementary than substitutive. Financial hedging reduces a firm's systematic risk, encouraging firm-specific investment by stakeholders. Larger firm-specific investment loads excessive idiosyncratic risk on the stakeholders, increasing the benefits of reducing idiosyncratic risk through diversification. Therefore, financial hedging can increase a firm's incentives to manage risk through diversification.

Skill Obsolescence and Flat Hierarchies: Creating Incentives for Skill Diversification

This paper explores the internal organization of production in technology firms. We propose that flat hierarchical organizations is the technology-intensive firm's response to the need for worker skill diversification in an environment where skills become obsolete very rapidly. If it is efficient for firms to provide investment in skill-diversification due to risk of obsolescence, the presence of promotion ladders in traditional vertically organized firms creates too high an incentive among firms to provide specialized investment which improves the promotion probability for workers. In such situations firms may adopt organizational forms with flat hierarchies in order to induce investment in skill diversification.

Resource Dependence, Economic Performance, and Political Stability

In many resource-dependent states, elites may face an important trade-off between the economic benefits of diversification and the possibility for future political competition that diversification may engender. However, distinctive features of global resource markets and national political economies may make diversification more or less attractive to political elites. The author argues that in three cases which illustrate the equilibrium paths of the game-theoretic model developed here—postindependence Bostwana, Mobutu’s Zaire, and Suharto’s Indonesia—three variables influenced elites’ incentives for diversification and thereby shaped outcomes along the dimensions of political stability and economic performance: the world market structure for the resource, the degree of societal opposition to elites, and the prior development of the nonresource private sector. These countries’ varied paths from resource wealth to political and economic outcomes suggest the need for conditional theories of the resource curse.

Market structure and diversification of mutual funds

This study characterizes a systematic relationship between the diversification incentives and the market structure of the mutual funds industry with investors differentiated by their attitude towards risk. With sufficiently low competition the subgame perfect portfolio equilibrium exhibits maximal risk differentiation. With intensified competition intermediate funds, i.e., those attracting investors with intermediate attitudes towards risk, select diversified portfolios. Finally, we offer a general characterization of how imperfect competition between risk-differentiated funds will generate an equilibrium relationship between risk and expected returns.

Vertical diversification in the pork industry: a portfolio theory approach

Markowitz’s mean‐variance approach is used to identify the returns to vertical investment in the pork industry. In addition to previous efforts, this paper considers not only returns to stock ownership, but uses operating return on investment in pork slaughter and hog production to evaluate the impacts of vertical investment within the industry segment. Results suggest there are indeed diversification incentives for vertical investment in the pork industry. However, results do differ for vertical direct investment versus investment through stock ownership.

Disclosure requirements and stock exchange listing choice in an international context

We use a rational expectations model to examine how public disclosure requirements affect listing decisions by rent-seeking corporate insiders, and allocation decisions by liquidity traders seeking to minimize trading costs. We find that exchanges competing for trading volume engage in a ‘race for the top’ whereunder disclosure requirements increase and trading costs fall. This result is robust to diversification incentives of risk-averse liquidity traders, institutional impediments that restrict the flow of liquidity, and listing costs. Under certain conditions, unrestricted liquidity flows to low disclosure exchanges. The consequences of cross-listing also are modeled.

Disclosure Requirements and Stock Exchange Listing Choice in an International Context

We use a rational expectations model to examine how public disclosure requirements affect listing decisions by rent-seeking corporate insiders, and allocation decisions by liquidity traders seeking to minimize trading costs. We find that exchanges competing for trading volume engage in a race for the top where under disclosure requirements increase and trading costs fall. This result is robust to diversification incentives of risk-averse liquidity traders, institutional impediments that restrict the flow of liquidity, and listing costs. Under certain conditions, unrestricted liquidity flows to low disclosure exchanges. The consequences of cross-listing also are modeled.

The Regulatory Treatment of Utility Diversification

Recent regulatory reform has gradually relaxed the constraints on vertical and horizontal diversification of public utilities. After earlier strategies of conglomerate diversification utilities more recently started to expand into domestic and international activities more closely related to their core business. Sound diversification may improve corporate performance, but raises complicated policy issues in firms operating in both regulated and unregulated markets. The paper studies the problems of cross-subsidization, risk-shifting and profit-shifting that may result under conditions of partial regulation. Policy approaches that enable firms to pursue efficient diversification while reducing inefficient diversification incentives created by partial regulation are being analyzed.

Diversification Incentives under "Price-Based" and "Cost-Based" Regulation

This article considers two schemes of regulationforfirms that serve both monopoly markets and markets subjected to substantial competition. The first form (cost-based regulation) combines elements of rate-of-return regulation (on monopoly markets) with filly distributed cost pricing, much like the form of regulation currently in place in the domestic telephone industry. The secondform (price-based regulation) would establish rate caps on noncompetitive services, and allow the firm to enter into competitive markets and charge whatever prices it might like in those markets. Models of both forms of regulation are developed and analyzed with respect to incentives for cost misreporting, choice of technology, cost-reducing innovation, choices of prices and output levels, and diversification into competitive markets.

Incentives for Diversification and the Structure of the Conglomerate Firm

In this paper, we examine the proposition that both the structures of conglomerate firms and their merger activities evidence a systematic attempt to diversify income sources and reduce the volatility of firms' profits. We test whether firms that are active in one line of business are more likely to be involved in another, the lower is the correlation between returns to the two activities, and whether, ceteris paribus, the likelihood of merger depends inversely on the correlation of cash flows to the principal activities of thecandidates for merger. We conclude that firms do act as if their goals include firm-level diversification.