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Title: Organizational Structure and Investment Strategy

Author(s): Gyöngyi Lóránth

Publication Date: December 2020

Keyword(s): branch, multinational business, Organizational structure and subsidiary

Programme Area(s): Financial Economics

Abstract: We show that a �rm can use its organizational structure to commit to an investment strategy. The �rm delegates sequential search and project management tasks to a manager. Ex post, the �rm turns away projects that generate high project management rent. However, because the expectation of such rent serves to defray the manager's search cost, investment might be optimal ex ante. A leveraged subsidiary mitigates this time-inconsistency problem by creating ex post risk-shifting incentives that counteract underinvestment. Subsidiaries are more valuable for projects with costly search, intermediate management costs, and returns that are uncorrelated with the existing business.

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Bibliographic Reference

Lóránth, G. 2020. 'Organizational Structure and Investment Strategy'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15602