The phenomenon of diversification is not new; in fact, it has been around for a while. Emerging in 1970s, the phenomenon in question was used to denote the situation when a company prefers to hold several stocks, thus, avoiding the possibility of losing its entire financial reserve (Kenny, 2009). True, holding only one stock is extremely risky for an entrepreneurship; however, a range of company leaders, terrified by the perspective of losing their money, disseminate the company’s investments into too many stocks. Therefore, the concern for the company’s financial stability, overrating of the company’s financial assets, and the willingness to seize control over the company, therefore, seemingly contributing to its stability can be viewed as the key reasons for the phenomenon of overdiversification to take place.
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As it has been stressed above, most companies resort to overdiversification due to an extreme caution concerning the safety of the company’s financial assets and the unwillingness to choose several investment options, which stems from the lack of trust towards the potential investment options. However, other reasons can be specified, such as industrial policies concerning taxes and antitrust regulations, managers pursuing their interests and the increase in job loss risks. It seems that each of these factors has its effect on a company overdiversification. Still, taxes and antitrust regulations seem to have the greatest effect, since, unlike other factors, they pose a direct threat to the company’s revenues.
Kenny, G. (2009). Diversification strategy: How to grow a business by diversifying successfully. Philadelphia, PA: Kogan Page Publishers.