Question

Which of the below arguments suggest that diversification is not necessarily in line with the interest of shareholders?

The institutional argument

The market power argument

The agency argument

The resource-based argument

The resource-based argument

Answer 1

The correct answer is

Market power argument

Market power argument says that the firms which are too much diversified does not have large market share in any industry and will not be able to create benefit for the shareholders. Highly diversified firm have lower market share then less diversified firm.

The institutional argument suggest that institutions can influence managers to work in the right direction, the agency theory is based on the idea that managers are agents to the shareholders. Resource based argument is the idea that managers uses resources in an optimal way to sustainably grow.