Informational Costs and Benefits of Creating Separately Identifiable Operating Segments

Posted: 8 Nov 2001

See all articles by Frank Gigler

Frank Gigler

University of Minnesota - Carlson School of Management

Thomas Hemmer

Rice University - Jesse H. Jones Graduate School of Business

Abstract

We provide an informational theory for how the ownership claims to a firm might be structured. When the market price of equity provides valuable contracting information there is a benefit to creating separate ownership claims to each of a firm's divisions. However, creating this information also generally has adverse incentive effects because it enriches the agent's strategy space. We show in a complete contracting setting that under a large class of agencies the firm is strictly better off bundling the ownership claims to divisions that are sufficiently similar and creating separate ownership claims only to divisions that are sufficiently different.

Keywords: Contracting; Tracking stock; Core competency

JEL Classification: G32, L22, M41

Suggested Citation

Gigler, Frank and Hemmer, Thomas, Informational Costs and Benefits of Creating Separately Identifiable Operating Segments. Available at SSRN: https://ssrn.com/abstract=290009

Frank Gigler (Contact Author)

University of Minnesota - Carlson School of Management ( email )

321 19th Avenue South
Minneapolis, MN 55455
United States
612-624-7641 (Phone)

Thomas Hemmer

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

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