The Hand of Corporate Management in Capital Allocations: Patterns of Investment in Multi- and Single-Business Firms

Posted: 26 Apr 2010

See all articles by David Bardolet

David Bardolet

Bocconi University - Department of Management and Technology

Dan Lovallo

University of Western Australia

Richard P. Rumelt

University of California, Los Angeles (UCLA) - Policy Area

Date Written: April 2010

Abstract

One of Chandler’s basic insights was that the new organizational structures adopted after the 1920s reflected a specialization of the roles of business and corporate managers. Business managers coordinated functions and corporate managers allocated resources. This article studies the impact of corporate management on capital allocation decisions by comparing investment behavior in multi- and single-business companies. Using a new taxonomy to control for the quality of each business unit, we analyze a cross-sectional sample of U.S. companies and identify a number of empirical regularities that highlight the allocative decisions of corporate management. In particular, we find that, when dealing with cash-needy businesses, multi-business firms invest more intensively in those that are less profitable. We find no evidence that this subsidy results in a higher success rate in making those businesses profitable over time. We suggest a number of explanations for this empirical pattern.

Suggested Citation

Bardolet, David and Lovallo, Dan and Rumelt, Richard P., The Hand of Corporate Management in Capital Allocations: Patterns of Investment in Multi- and Single-Business Firms (April 2010). Industrial and Corporate Change, Vol. 19, Issue 2, pp. 591-612, 2010, Available at SSRN: https://ssrn.com/abstract=1593996 or http://dx.doi.org/dtq007

David Bardolet (Contact Author)

Bocconi University - Department of Management and Technology ( email )

Via Roentgen 1
Milan, MI 20136
Italy

Dan Lovallo

University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
AUSTRALIA

Richard P. Rumelt

University of California, Los Angeles (UCLA) - Policy Area ( email )

110 Westwood Plaza
Los Angeles, CA 90095
United States

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