Diversification and delegation in firms

Vittoria Cerasi and Sonja Daltung

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper shows how separation of ownership and control may arise as a response to overload costs, despite agency costs, and how conglomerates arise as solution to information asymmetries in capital markets. In a context where entrepreneurs have the ability to run projects and improve their future cash flow, there could be rationing of credit due to moral hazard between entrepreneurs and investors. Diversification could mitigate the moral hazard problem. However for a single entrepreneur running many different projects might be increasingly costly due to overload costs. Delegating the running of projects to several managers can not only reduce overload costs, but also the moral hazard problem of external financing. In this paper we show that delegation can be the only way to exploit the gains from diversification when overload costs of diversification are high; delegation thus is the key ingredient to be able to diversify.

Keywords: conglomerates; delegation; diversification; monitoring (search for similar items in EconPapers)
JEL-codes: D23 D82 G20 G32 L22 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2002-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://eprints.lse.ac.uk/24907/ Open access version. (application/pdf)

Related works:
Working Paper: Diversification and Delegation in Firms (2002)
Working Paper: Diversification and Delegation in Firms (2001)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24907

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().