Access to Financing and the Organizational Structure of the Firm
46 Pages Posted: 4 Mar 2002
Date Written: March 17, 2002
This paper explores the impact of the organizational structure of a firm on its financing capacity. Unitary-form and multidivisional-form companies differ according to the distribution of tasks among managers. Within multidivisional firms, strategic decisions are taken by corporate headquarters while operational decisions are made by divisional managers. Conversely, within a unitary-form company, an entrepreneur takes both decisions. When moral hazard plagues the two kinds of decision-making, I show that the control corporate headquarters have over resources represents both a drawback and an advantage for multidivisional firms. Overall, when operational problems are severe enough relative to strategic problems, the unitary form dominates. Conversely, when strategic problems are prevailing, the multidivisional form is more efficient. These results drive empirical implications regarding the value of diversification, the extent of internal capital markets, and the developement of innovation.
JEL Classification: G3, G31, G34
Suggested Citation: Suggested Citation