An investor is analyzing two firms in the same industry. She is looking for long-term performance from her investment. Both firms are basically identical except one firm is involved in substantial downsizing and the other firm is undertaking aggressive downscoping. The investor should invest in the:
A) downscoping firm because the higher debt load will discipline managers to act in shareholders' best interests.
B) downscoping firm because of reduced debt costs and the emphasis on strategic controls derived from focusing on the firm's core businesses.
C) downsizing firm because it will be making decisions based on tactical strategies.
D) downsizing firm because it is eliminating employees who are essentially "dead weight" and are dragging down the firm's profitability.

Question

Quizplus · Accepted Answer

The investor should invest in the downscoping firm because this strategy focuses on the firm's core businesses, which can lead to better long-term performance. Additionally, downscoping can lead to reduced debt costs and the emphasis on strategic controls, which can benefit shareholders. In contrast, downsizing may result in short-term cost savings but may not necessarily lead to improved long-term performance.

An Investor Is Analyzing Two Firms in the Same Industry