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Abstract
Previous literature on diversification strategies has focused primarily on motivation and value creation from the perspective of publicly traded companies. For publicly traded companies, using diversification - whether into different product markets, industries, or countries - solely for risk reduction purposes and lowering volatility in returns is generally considered not to be in the best interests of shareholders who can accomplish this more efficiently themselves by holding a diversified portfolio of stocks. Far less research has examined rational motivations for diversification from the perspective of a privately held company. Here there is no separation of ownership and control and owners are unable to diversify away unsystematic risk by holding a portfolio of stocks. This paper focuses on country-level factors important for privately held holding companies to consider when making geographic diversification decisions for risk reduction purposes. Using a sample of 8 countries, including Germany, and their annual GDP growth rates from 2003 to 2013, this study found evidence that there are indeed risk reduction benefits connected to international diversification into certain countries, under the premise that the annual GDP growth rate is a representative indicator for a country's economic situation. The results from the conducted quantitative analysis support the theoretical findings based on previous literature on international diversification that under certain circumstances international diversification is a valid means to reduce the volatility in returns and thereby the risk of bankruptcy in the long run.
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Abstract
Previous literature on diversification strategies has focused primarily on motivation and value creation from the perspective of publicly traded companies. For publicly traded companies, using diversification - whether into different product markets, industries, or countries - solely for risk reduction purposes and lowering volatility in returns is generally considered not to be in the best interests of shareholders who can accomplish this more efficiently themselves by holding a diversified portfolio of stocks. Far less research has examined rational motivations for diversification from the perspective of a privately held company. Here there is no separation of ownership and control and owners are unable to diversify away unsystematic risk by holding a portfolio of stocks. This paper focuses on country-level factors important for privately held holding companies to consider when making geographic diversification decisions for risk reduction purposes. Using a sample of 8 countries, including Germany, and their annual GDP growth rates from 2003 to 2013, this study found evidence that there are indeed risk reduction benefits connected to international diversification into certain countries, under the premise that the annual GDP growth rate is a representative indicator for a country's economic situation. The results from the conducted quantitative analysis support the theoretical findings based on previous literature on international diversification that under certain circumstances international diversification is a valid means to reduce the volatility in returns and thereby the risk of bankruptcy in the long run.