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Diversification and Delegation in Firms

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  • Sonja Daltung
  • Vittoria Cerasi

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.

Suggested Citation

  • Sonja Daltung & Vittoria Cerasi, 2002. "Diversification and Delegation in Firms," FMG Discussion Papers dp403, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp403
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    References listed on IDEAS

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    Cited by:

    1. Yoonhee Tina Chang, 2007. "Collective relationship banking and private information monitoring in Korea," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 15, pages 483-504, July.
    2. Carletti, Elena & Cerasi, Vittoria & Daltung, Sonja, 2007. "Multiple-bank lending: Diversification and free-riding in monitoring," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 425-451, July.
    3. Yoonhee Tina Chang, 2004. "Relationship Banking in Bilateral Oligopoly and Asymmetric Information," Econometric Society 2004 Far Eastern Meetings 734, Econometric Society.
    4. Flaxio Toxvaerd, 2005. "Mergers, Diversification and Financial Intermediation," Money Macro and Finance (MMF) Research Group Conference 2005 43, Money Macro and Finance Research Group.

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    More about this item

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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