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Organizational Scope and Allocation of Resources: Evidence on Rigid Capital Budgets

Oguzhan Ozbas
University of Southern California - Marshall School of Business - Finance and Business Economics Department

Zekiye Selvili
California State University, Fullerton - Department of Finance


October 30, 2009


Abstract:     
This paper compares the investment behavior of multi-segment firms (firms with multiple business units) with that of single-segment firms. Models that omit within-firm information and incentive problems predict both set of firms to invest in response to investment opportunities. Our main findings reject this null. In particular, multi-segment firms exhibit a tendency to maintain a fixed level of capital in their business units regardless of investment opportunities. In addition to exhibiting rigid investment behavior, multi-segment firms are also less responsive to investment opportunities than single-segment firms. These effects are especially strong in multi-segment firms with unrelated business units. Our findings support the existence of agency problems within multi-segment firms.

Keywords: Organizational scope, Rigid capital budgets

JEL Classifications: D21, D23, G31

Working Paper Series

Date posted: February 03, 2006 ; Last revised: November 03, 2009

Suggested Citation

Ozbas, Oguzhan and Selvili, Zekiye, Organizational Scope and Allocation of Resources: Evidence on Rigid Capital Budgets (October 30, 2009). Available at SSRN: http://ssrn.com/abstract=880789


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Contact Information

Oguzhan Ozbas (Contact Author)
University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )
Marshall School of Business
Los Angeles, CA 90089
United States
213-740-0781 (Phone)
213-740-6650 (Fax)
Zekiye Selvili
California State University, Fullerton - Department of Finance ( email )
PO Box 34080
Fullerton, CA 92834-9480
United States
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