Modigliani and Miller Meet Chandler: Organizational Complexity, Capital Structure, and Firm Value

Posted: 15 Mar 2009 Last revised: 7 Oct 2011

See all articles by Alberto Manconi

Alberto Manconi

Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Massimo Massa

INSEAD - Finance

Date Written: September 1, 2009

Abstract

We study how organizational complexity affects capital structure and firm value. We measure organizational complexity as the number of layers in the firm’s subsidiary structure, and focus on a sample of US firms over the period 1998-2006. We argue that organizational complexity makes the firm opaque and increases the asymmetry of information between the firm and the market. We show that organizational complexity is strongly related to standard information asymmetry proxies. In line with the predictions of the pecking order theory, firms characterized by a more complex organizational structure resort to less equity financing and more debt financing, have higher leverage, display a higher investment-cash flow sensitivity and build up greater “financial slack.” The higher information asymmetry created by organizational complexity, by reducing stock liquidity, reduces the value of equity.

Keywords: Organizational structure, Capital structure, Pecking order

JEL Classification: G34, G30, L25

Suggested Citation

Manconi, Alberto and Massa, Massimo, Modigliani and Miller Meet Chandler: Organizational Complexity, Capital Structure, and Firm Value (September 1, 2009). Available at SSRN: https://ssrn.com/abstract=1359762

Alberto Manconi

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

HOME PAGE: http://mypage.unibocconi.eu/albertomanconi/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Massimo Massa (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

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