Career Concerns and Resource Allocation in Conglomerates

44 Pages Posted: 2 Mar 2002

See all articles by Anand M. Goel

Anand M. Goel

Stevens Institute of Technology

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

M. P. Narayanan

University of Michigan, Stephen M. Ross School of Business

Date Written: February 2002

Abstract

This paper investigates the resource allocation decisions in conglomerates when managers are motivated by career concerns. The output of a conglomerate division is determined by the unknown ability of corporate management, the capital employed in the division, and intangible resources that the management allocates to the division. While capital allocation across divisions is fully observable and contractible, the allocation of intangible resources is not. The divisions differ in how informative their cash flows are about managerial ability. Corporate management, influenced by career concerns, seeks to maximize perceived ability. In this set up, we show that it is in the interest of management to overallocate intangible resources to the more informative divisions in order to increase the market's perception of its ability. Anticipating this bias, it is in the firm's owners' interest to also overallocate capital to the more informative divisions. To the extent that industries with lower cash flow informativeness have higher q-ratios, this inefficiency results in a form of corporate socialism. Value loss due to the allocational inefficiency increases with the difference in informativeness and the correlation between the divisional cash flows. The model highlights a cost of segment reporting and tracking stocks, namely, that they create avenues for managers to distort their perceived ability at the expense of investors.

Keywords: Conglomeration, capital misallocation, career concerns, resource allocation, inefficient capital allocation

JEL Classification: D82, D83, G31, G34

Suggested Citation

Goel, Anand Mohan and Nanda, Vikram K. and Narayanan, M. P., Career Concerns and Resource Allocation in Conglomerates (February 2002). Available at SSRN: https://ssrn.com/abstract=301558 or http://dx.doi.org/10.2139/ssrn.301558

Anand Mohan Goel

Stevens Institute of Technology ( email )

Hoboken, NJ 07030
United States

HOME PAGE: http://www.anandgoel.org

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

M. P. Narayanan (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-5936 (Phone)
734-936-0274 (Fax)

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