Organizational Structure as a Determinant of Performance: Evidence from Mutual Funds

Abstract

This paper develops and tests a model of how organizational structure influences organizational performance. Organizational structure, conceptualized as the decision-making structure among a group of individuals, is shown to affect the number of initiatives pursued by organizations, and the omission and commission errors (Type I and II errors, respectively) made by organizations. The empirical setting is over 150,000 stock-picking decisions made by 609 mutual funds. Mutual funds offer an ideal and rare setting to test the theory, since there are detailed records on the projects they face, the decisions they make, and the outcomes of these decisions. The study's independent variable, organizational structure, is coded based on fund management descriptions made by Morningstar, and estimates of the omission and commission errors are computed by a novel technique that uses bootstrapping to create measures that are comparable across funds. The findings suggest that organizational structure has relevant and predictable effects on a wide range of organizations. In particular, the paper shows empirically that increasing the consensus threshold required by a committee in charge of selecting projects leads to more omission errors, fewer commission errors, and fewer approved projects. Applications include designing organizations that achieve a given mix of exploration and exploitation as well as predicting the consequences of centralization and decentralization. This work constitutes the first large-sample empirical test of the model by Sah and Stiglitz (1986).

Keywords: organization design, omission and commission errors, exploration/exploitation, centralization and decentralization, decision making

JEL Classification: D81, D23, D71, D73