Why are Firms Rigid? A General Framework and Empirical Tests.

Abstract

We present a general framework for understanding why firms are slow to make major strategic changes in a wide-range of organizational settings. We then apply this framework to investigate, more specifically, the relationship between firm age and scope in hedge funds. Our empirical analyses demonstrate that younger hedge funds outperform older hedge funds both prior to and after the launch of a new fund. Based on our framework, these results suggest that age-based rigidity in hedge funds is more attributable to internal political frictions that influence project selection than to constraints associated with exchange partners or implementation costs. We conclude by discussing how our framework can be used to identify the dominant source of rigidity in other contexts.

Keywords: strategic change, rigidity, organizational age, inertia, diversification, hedge funds

JEL Classification: D21, D23, D70, L21