Again, this argument has fallen somewhat into disfavor, because there's really
little empirical evidence that what we might call an internal capital market,
this internal investing in opportunities, is any more efficient
than a public capital net markets that are available to the general public.
So again, this is an argument for
diversification that I would say has really fallen in disfavor in recent years.
And this reflects, I think, the changing attitudes towards conglomerates as well.
These were some of the same exact arguments given for
why having this diverse, unrelated portfolio of businesses made sense, again,
from a financial standpoint.
These arguments aren't as strong as they might have been 30 years or so ago.
How about we hold this diversified portfolio to reduce
the volatility of the businesses that we hold.
In other words, one could imagine that some businesses and
some industries are highly volatile.
Think of the movie industry.
So movie companies have hit blockbusters and then they have failures as well.
And as a result, their earnings can fluctuate wildly year in, year out.
By diversifying into other lines of business,
as the argument goes, that allows them to reduce that volatility that's inherent in
one of their industries.
Smooth them out, spread them out, and therefore reduce the risk of bankruptcy or
other negative financial outcomes.
Now, again, the critique here is, yes, you could do that,
that type of smoothing of risk.
But at the end of the day, shareholders can do that for themselves.
They can understand the inherent risk of investing in a movie business.
And therefore, they can decide how they wanna diversify their risks themselves.
It's not clear, it's really the firm's responsibility to do this.
[BLANK AUDIO] Last but not least, we can overall reduce the risk
by diversifying by reducing some of our costs.
Let's say employment cost, or financial cost.
By reducing this risk of bankruptcy.
So this is a nuance on our last argument, which said
this will help smooth our earnings, maybe reduce some of the risk of bankruptcy.
This is saying, that there's actually a cost to those risks.
Again, think about employees who'll demand higher payment if they believe this is
a business that is very volatile and risky.
Therefore, we can lower employment costs and
become more attractive if we diversify our assets in this way.