Organizational Scope and Allocation of Resources: Evidence on Rigid Capital Budgets
36 Pages Posted: 3 Feb 2006 Last revised: 3 Nov 2009
Date Written: October 30, 2009
This paper compares the investment behavior of multi-segment firms (firms with multiple business units) with that of single-segment firms. Models that omit within-firm information and incentive problems predict both set of firms to invest in response to investment opportunities. Our main findings reject this null. In particular, multi-segment firms exhibit a tendency to maintain a fixed level of capital in their business units regardless of investment opportunities. In addition to exhibiting rigid investment behavior, multi-segment firms are also less responsive to investment opportunities than single-segment firms. These effects are especially strong in multi-segment firms with unrelated business units. Our findings support the existence of agency problems within multi-segment firms.
Keywords: Organizational scope, Rigid capital budgets
JEL Classification: D21, D23, G31
Suggested Citation: Suggested Citation