DP15602 Organizational Structure and Investment Strategy
| Author(s): | Gyöngyi Lóránth |
| Publication Date: | December 2020 |
| Keyword(s): | branch, multinational business, Organizational structure, subsidiary |
| JEL(s): | G32, G34, L22 |
| Programme Areas: | Financial Economics |
| Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=15602 |
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.