About the potential benefits and costs of diversification

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1. Economists argue about the potential benefits and costs of diversification. For instance, while diversification can certainly help company to promote new products, at the same time through the merger of two firms it can be more expensive to develop communication, information and operating system. Prove that under certain circumstances diversification can still create a real value.

2. In accordance with economic theory, the individuals are always trying to maximize their own utilities. Thus far, the owners are likely to be interested in maximizing their own profits, while the managers and other workers do not share this goal necessarily. Discuss the sources of conflicts between the owners and the managers of the firms.

3. Sometimes managers do not have strong incentives to maximize the firm’s value. At the same time development of the control systems can be both difficult and expensive. In this case compensation schemes based on the performance measurement can be very helpful in order to eliminate the potential conflict between owners and the management of the company. Provide examples based on your life experience with the analysis of different compensation systems and their advantages and disadvantages from the owner’s point of view.

Reference no: EM13733307

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