 Corporate diversification and innovation: Managerial myopia or inefficient internal capital markets?Peter G. Klein and Robert Wuebker Managerial and Decision Economics, 2020, vol. 41, issue 8, 1403-1416 Abstract: Which is more innovative: the decentralized, diversified firm, or the centralized, more narrowly focused firm? The economics and finance literatures argue that diversified firms have innovation advantages as their operating units have access to an internal capital market. In contrast, the strategy and entrepreneurship literatures argue that managers of these firms suffer from “managerial myopia,” discouraging them from investing in projects with long‐term, uncertain payoffs. We take a fresh look at the relationship between innovation and diversification using a comprehensive sample of diversified and nondiversified firms and a novel approach that teases out the mechanisms influencing the relationship between diversification and innovation. Consistent with conceptual and empirical work in strategy, we find a robust negative correlation between diversification and R&D intensity, suggesting that diversification reduces innovation by discouraging investment. However, our analysis suggests that internal capital market inefficiencies, rather than managerial myopia, is responsible for this observed negative relationship. Date: 2020 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:wly:mgtdec:v:41:y:2020:i:8:p:1403-1416 Access Statistics for this article Managerial and Decision Economics is currently edited by Antony Dnes More articles in Managerial and Decision Economics from John Wiley & Sons, Ltd. |
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