Question

Indicate true or false to the following statements: i) Diversification is a sensible reason for mergers because it is cheaper for corporations to diversify their business portfolios than for investors to diversify their portfolios. ii) Agency costs arise from the senior management’s inability to control shareholders. iii) Mergers are always successful because corporations can foresee the synergies perfectly well in advance. iv) Agency costs arise from the senior management’s inability to observe the behaviour of the shareholders.

Answer 1

i) Diversification is a sensible reason for mergers because it is cheaper for corporations to diversify their business portfolios than for investors to diversify their portfolios.

TRUE

ii) Agency costs arise from the senior management’s inability to control shareholders.

FALSE. [It is costs that arise where shareholders are unable to control senior management]

iii) Mergers are always successful because corporations can foresee the synergies perfectly well in advance.

FALSE

iv) Agency costs arise from the senior management’s inability to observe the behavior of the shareholders.

FALSE