Does diversification achieved through a merger create value? Why or why not?
A)Yes,diversification lowers the volatility of a firm's earnings which,increases the firm's value to shareholders.
B)Yes,diversification lowers the total risk of a firm which,provides a compensable benefit.
C)Yes,diversification increases a firm's earnings which,creates value for the firm.
D)No,diversification lowers unsystematic risk but has no real value to shareholders.
E)No,diversification lowers a firm's earnings and thus destroys value.

Question

Quizplus · Accepted Answer

Diversification through a merger primarily reduces unsystematic risk, which is not compensable since shareholders can achieve diversification on their own through portfolio diversification. Therefore, it does not inherently create value for shareholders.

Does Diversification Achieved Through a Merger Create Value? Why or Why