Extending Modern Portfolio Theory Into the Domain of Corporate Diversification: Does It Apply?

Lubatkin, Michael; Chatterjee, Sayan

doi:10.2307/256772

Cited by 196 publications

(109 citation statements)

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“…Several authors suggest that there is a nonlinear relationship between risk and diversification (54,55), and a nonparametric fitting of the data suggests a concave relationship between CV and HHI (Fig. S1).…”

Section: Methodsmentioning

confidence: 92%

Income diversification and risk for fishermen

Kasperski

Holland

2013

Proc. Natl. Acad. Sci. U.S.A.

217

169

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Catches and prices from many fisheries exhibit high interannual variability, leading to variability in the income derived by fishery participants. The economic risk posed by this may be mitigated in some cases if individuals participate in several different fisheries, particularly if revenues from those fisheries are uncorrelated or vary asynchronously. We construct indices of gross income diversification from fisheries at the level of individual vessels and find that the income of the current fleet of vessels on the US West Coast and in Alaska is less diverse than at any point in the past 30 y. We also find a dome-shaped relationship between the variability of individuals' income and income diversification, which implies that a small amount of diversification does not reduce income risk but that higher levels of diversification can substantially reduce the variability of income from fishing. Moving from a single fishery strategy to a 50-25-25 split in revenues reduces the expected coefficient of variation of gross revenues between 24% and 65% for the vessels included in this study. The increasing access restrictions in many marine fisheries through license reductions and moratoriums have the potential to limit fishermen's ability to diversify their income risk across multiple fisheries. Catch share programs often result in consolidation initially and may reduce diversification. However, catch share programs also make it feasible for fishermen to build a portfolio of harvest privileges and potentially reduce their income risk. Therefore, catch share programs create both threats and opportunities for fishermen wishing to maintain diversified fishing strategies.F ishing is a risky business. Not only do fishermen face the highest rate of work-related fatalities of any US industry, with a fatality rate more than 30 times higher than average (1), they face high financial risk as a result of high year-to-year variation in their income (2). In this article we focus on the latter form of risk. High annual variation in income is a problem that is common to a variety of occupations dependent on natural resources, and there has been extensive study of income risk-coping mechanisms, particularly for farmers in developing countries (3-10). Riskreduction strategies used in agriculture might also be effective in fisheries. Crop diversification is a common means of reducing risk in agriculture, taking advantage of asynchronous variation in yield-response and prices to minimize idiosyncratic risk (11-13). Another common strategy in agriculture, particularly in semiarid regions with high fine-scale variation in rainfall, is to farm a number of geographically separated plots to ensure some will be in areas with sufficient rainfall (6). McCloskey (14) argues that risk reduction was the motivation of English farmers for "scattering each man's holdings in dozens of small strips" which, although inefficient, was widely practiced. Farmers can also plant a combination of crops adapted to wet or dry conditions to mitigate the risk assoc...

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Section: Methodsmentioning

confidence: 92%

Income diversification and risk for fishermen

Kasperski

Holland

2013

Proc. Natl. Acad. Sci. U.S.A.

217

169

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“…In another words, the greater the monitoring skills, the higher the cost would be for the manager. Lubatkin and Chatterjee (1994) said that by increasing the debt to equity ratio, the shareholder of the firm will be able to ensure that the managers are working at their best interest and running business more efficiently and the excess cash flows generated from business would be distribute to the investor as a return after the repayments of debts, and avoiding negative net present value (NPV) projects. The main two bodies of the corporate governance are the lenders and shareholders.…”

Section: "The Directors Of Such Companies However Being the Managermentioning

confidence: 99%

Relationship between CEO Pay and Firm Performance: Evidences from Malaysia Listed Firms

Ismail¹,

Yabai²,

Hahn³

2014

IOSRJEF

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“…Businesses with multiple product lines, both within and across sub-sectors, may benefit from two financial portfolio effects: risk reduction and internal capital allocation efficiencies. Risk reductions obtain when the cash flows of different product lines correlate imperfectly, so that product line breadth reduces the variance, and thus the overall risk, of the business (Lubatkin and Chatterjee, 1994). Such diversification can enhance business longevity by dampening the financial fluctuations that can push a business into insolvency.…”

Section: Scope: Benefits Of Product Line Breadthmentioning

confidence: 99%