Organizational Structure and Investment Strategy

Lóránth, Gyöngyi, Alan Morrison and Jing Zeng

No 15602, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We show that a firm can use its organizational structure to commit to an investment strategy. The firmdelegates sequential search and project management tasks to a manager. Ex post, the firm 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.

Keywords: Organizational structure; Multinational business; Branch; Subsidiary (search for similar items in EconPapers)
JEL-codes: G32 G34 L22 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-cfn, nep-com and nep-ppm
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