Organizational Scope and Allocation of Resources: Evidence on Rigid Capital Budgets
University of Southern California - Marshall School of Business - Finance and Business Economics Department
California State University, Fullerton - Department of Finance
October 30, 2009
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.
Number of Pages in PDF File: 36
Keywords: Organizational scope, Rigid capital budgets
JEL Classification: D21, D23, G31working papers series
Date posted: February 3, 2006 ; Last revised: November 3, 2009
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