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Conglomerate Mergers as Defense Against the Risk of Relative Price Variability

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  • Pekka Ahtiala

Abstract

This paper studies the effects of the risk of relative price variability on the optimal structure of a firm's cash flows with an application of portfolio theory. It is suggested that, when relative price risk is greater, it is optimal for the management to diversify, at the margin, and emphasize economies of scale or scope when the risk is smaller. Conglomerate mergers should therefore be positively associated with relative price risk, given the variables affecting mergers as a whole. Empirical evidence is found to lend support to the theory. The inflation rate explains conglomerate mergers even better, which suggests that relative price risk may constitute another real resource cost of inflation. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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  • Pekka Ahtiala, 2000. "Conglomerate Mergers as Defense Against the Risk of Relative Price Variability," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 160-163, February.
    • Handle: RePEc:tpr:restat:v:82:y:2000:i:1:p:160-163
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    File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/rest.2000.82.1.160
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    Cited by:

    1. O'Donoghue, Erik J. & Key, Nigel D. & Roberts, Michael J., 2005. "Does risk matter for farm businesses? The effect of crop insurance on production and diversification," 2005 Annual meeting, July 24-27, Providence, RI 19397, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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