JOHN C. SCHREINER* ONE OF THE MORE REMARKABLE DEVELOPMENTS within finance during the current decade has been the rapid emergence of the conglomerate type of firm. Viewed internally, the conglomerate phenomenon has proven of great interest to academicians studying economies of scale for both human and non-human resources, while from an external focus, conglomerates represent a new type of investment opportunity. Although interest in conglomerates has resulted in various theories for explaining or rationalizing conglomerate development, this paper is concerned only with the external view of conglomerates as a means toward diversification. Specifically, the purposes of this study are (1) to investigate the relative merits of using a portfolio approach to explain conglomerate diversification, ( 2 ) to develop and test a means of measuring the ex ante diversification potential of given conglomerates, and ( 3 ) to compare the observed diversification patterns of certain conglomerates with those of mutual funds which presumably are specifically organized for just such a purpose. Section I summarizes the rapid growth of conglomerate firms during recent years, discusses alternative theories for explaining conglomerate growth, and focuses on the portfolio theory of diversification. It also explains a ranking criterion based on portfolio theory
The Journal of Finance – Wiley
Published: Jun 1, 1969
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