Which of the following statements regarding mergers and diversification is FALSE?
A)Like a large portfolio, large firms bear less idiosyncratic risk, so often mergers are justified on the basis that the combined firm is less risky.
B)Because it may be easier to measure performance accurately in a conglomerate, agency costs may be reduced and resources may be more efficiently allocated.
C)Because most shareholders will already be holding a well-diversified portfolio, they get no further benefit from the firm diversifying through acquisition.
D)Because employees are obligated to hold idiosyncratic risk, they benefit when the firm reduces that risk by conglomerating.

Question

Quizplus · Accepted Answer

Statement B is false because it is generally more difficult to measure performance accurately in a conglomerate due to the complexity and diversity of operations, which can increase agency costs rather than reduce them.

Which of the Following Statements Regarding Mergers and Diversification Is