DP665 Organizational Prospects, Influence Costs, and Ownership Changes

Author(s): Margaret A Meyer, Paul Milgrom, Donald John Roberts
Publication Date: June 1992
Keyword(s): Acquisitions and Mergers, Divestitures, Firm Boundaries, Influence Costs, Ownership, Politics
JEL(s): D21, D23, G34, L22
Programme Areas: Applied Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=665

We augment efficiency-based theories of ownership by including influence costs. Our principal conclusion is that the prospect of organizational decline and layoffs creates additional influence costs in multi-unit organizations that would be absent if there were no prospect of layoffs and would be lessened or eliminated in focused organizations. This helps explain the tendency of firms to divest poorly performing units, as well as the pattern of sales of such units to firms already in businesses related to that of the divested unit.