An asset partitioning perspective on corporate groups

Abstract

This paper develops an asset partitioning perspective on corporate groups. Asset partitioning refers to the process of dividing assets under common control into separate, legally independent entities. Thus, when a group incorporates a previously unincorporated business unit, its assets are more finely partitioned. We highlight several important costs and benefits of finer asset partitioning. Benefits include risk compartmentalization, greater internal transparency, greater autonomy at the subsidiary level, and learning about individual assets. Costs include stunted resource redeployment and lower headquarters monitoring. Using data from sixteen countries from around the world, we demonstrate the practical relevance of our perspective, and contrast its predictions with those of other leading perspectives on corporate groups.

Keywords: Theory of the firm, limited liability, asset partitioning, decentralization