Diversification and Delegation in Firms
AbstractThis 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.
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Bibliographic InfoPaper provided by Financial Markets Group in its series FMG Discussion Papers with number dp403.
Date of creation: Feb 2002
Date of revision:
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Web page: http://www.lse.ac.uk/fmg/
Other versions of this item:
- Vittoria Cerasi & Sonja Daltung, 2002. "Diversification and delegation in firms," LSE Research Online Documents on Economics 24907, London School of Economics and Political Science, LSE Library.
- Cerasi, Vittoria & Daltung, Sonja, 2001. "Diversification and Delegation in Firms," Working Paper Series 131, Sveriges Riksbank (Central Bank of Sweden).
- 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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