Organizational Structure, Voluntary Disclosure, and Investment Efficiency
41 Pages Posted: 28 Jun 2019
Date Written: June 25, 2019
The understanding of what determines firm boundaries is central to the theory of the firm, and much attention has been paid to firms’ decisions to organize multiple projects within one firm. One factor that drives these decisions is information sharing that facilitates efficient internal capital allocation, but few studies investigate how firms’ information sharing with external capital markets can affect firm boundaries and how they affect firms’ disclosure behaviors. This project examines the relationship between external disclosures and firm boundaries with an emphasis on internal capital allocation. My analysis demonstrates two main points. First, the ability to allocate capital internally induces a multi-project firm to withhold more private information to the external capital markets than a group of stand-alone firms. Second, I show conditions under which it is beneficial to organize multiple projects within one firm. Specifically, if disclosure friction is at a moderate level, the value of a multi-project firm is greater than the value of a group of stand-alone firms. If firms choose their organizational structure based on firm value, these results imply that firms that are subject to a moderate level of disclosure friction choose to own multiple projects under the same roof. In addition, multi-project firms are informationally opaque because of i) disclosure friction and ii) internal capital allocation.
Keywords: Organizational structure, voluntary disclosure, corporate investment
JEL Classification: D23, D83, G31
Suggested Citation: Suggested Citation