A firm may desire to diversify its product lines and businesses in an attempt to reduce its business risk by smoothing out cyclical movements in its earnings. For example, a capital equipment manufacturer might achieve steadier earnings by expanding into the replacement parts business. During a recession, expenditures for capital equipment may slow down, but expenditures on maintenance and replacement parts may increase. This reason is of questionable benefit to the company’s shareholders because most investors can diversify their holdings (through the securities markets) more easily and at a lower cost than the company can. LO1