Spread Too Thin: Uncertainty Shocks and Diseconomies of Scope

Posted: 5 Nov 2011

See all articles by Gabriel Natividad

Gabriel Natividad

Universidad de Piura

Olav Sorenson

Yale School of Management

Date Written: October 1, 2011

Abstract

Although many streams of literature have recognized that firms with broader scope often underperform those with greater focus, relatively little research has examined the mechanisms that might account for these diseconomies of scope. One potential mechanism is that uncertainty shocks |events or short-term periods that upset the normal course of business place unusual demands on the limited attention of managers. When managers of larger, more diverse firms allocate their time and organizational resources to address these events, they necessarily divert attention and resources away from other businesses, thereby converting these uncertainty shocks in one part of the organization to performance shocks in other parts of it. An empirical examination of the relationship between the distribution of films in theaters and videos for sale demonstrates that uncertainty shocks in theatrical distribution become performance shocks in the video market and that the magnitude of these effects increases for larger, more diversified firms.

JEL Classification: C23, D81, L25, L82

Suggested Citation

Natividad, Gabriel and Sorenson, Olav, Spread Too Thin: Uncertainty Shocks and Diseconomies of Scope (October 1, 2011). NET Institute Working Paper No. 11-04. Available at SSRN: https://ssrn.com/abstract=1952720 or http://dx.doi.org/10.2139/ssrn.1952720

Gabriel Natividad (Contact Author)

Universidad de Piura ( email )

Calle Martir Olaya 162
Lima, Lima L18
Peru

Olav Sorenson

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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