Advanced Search
MyIDEAS: Login to save this paper or follow this series

Diversification and Delegation in Firms

Contents:

Author Info

  • Cerasi, Vittoria

    ()
    (Dipartimento di Statistica)

  • Daltung, Sonja

    ()
    (Research Department, Central Bank of Sweden)

Abstract

This paper is about the corporate structure, the organizational structure, and the financial structure of firms, and how they relate to each other. We show that separation of ownership and control may arise as a response to overload costs, although it involves agency costs, and that conglomerates can arise due to information problems in capital markets. In a context where entrepreneurs have the ability to run projects and to improve their future cash flow, there could be rationing of credit due to moral hazard between the entrepreneur and external investors. Diversification could mitigate the moral hazard problem. However for a single entrepreneur the running of many different projects might be increasingly costly due to overload, that is when, due to limited attention, the marginal effort becomes less effective. Delegating the running of projects to several managers can not only reduce overload costs, but also reduce the moral hazard problem of external financing. In this paper we show that delegation can be the only way to exploit gains from diversification when overload costs of diversification are high; delegation thus is the key ingredient to be able to diversify.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.riksbank.se/upload/Dokument_riksbank/Kat_foa/wp_131.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 131.

as in new window
Length: 33 pages
Date of creation: 01 Dec 2001
Date of revision:
Handle: RePEc:hhs:rbnkwp:0131

Contact details of provider:
Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
Email:
Web page: http://www.riksbank.com/
More information through EDIRC

Related research

Keywords: Conglomerates; Delegation; Diversification; Monitoring;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(3), pages 401-19, June.
  2. Bengt Holmstrom & Jean Tirole, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 95-1, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Boot, Arnoud W. A. & Schmeits, Anjolein, 2000. "Market Discipline and Incentive Problems in Conglomerate Firms with Applications to Banking," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 9(3), pages 240-273, July.
  4. Stein, Jeremy C., 2003. "Agency, information and corporate investment," Handbook of the Economics of Finance, Elsevier, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 2, pages 111-165 Elsevier.
  5. Cerasi, Vittoria & Daltung, Sonja, 2000. "The optimal size of a bank: Costs and benefits of diversification," European Economic Review, Elsevier, Elsevier, vol. 44(9), pages 1701-1726, October.
  6. Qian, Yingyi, 1994. "Incentives and Loss of Control in an Optimal Hierarchy," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(3), pages 527-44, July.
  7. Shleifer, Andrei & Vishny, Robert W., 1989. "Management entrenchment : The case of manager-specific investments," Journal of Financial Economics, Elsevier, Elsevier, vol. 25(1), pages 123-139, November.
  8. Gertner, Robert H & Scharfstein, David S & Stein, Jeremy C, 1994. "Internal versus External Capital Markets," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(4), pages 1211-30, November.
  9. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
  10. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 323-29, May.
  11. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  12. Li, David D & Li, Shan, 1996. " A Theory of Corporate Scope and Financial Structure," Journal of Finance, American Finance Association, American Finance Association, vol. 51(2), pages 691-709, June.
  13. Berger, Philip G. & Ofek, Eli, 1995. "Diversification's effect on firm value," Journal of Financial Economics, Elsevier, Elsevier, vol. 37(1), pages 39-65, January.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Carletti, Elena & Cerasi, Vittoria & Daltung, Sonja, 2007. "Multiple-bank lending: Diversification and free-riding in monitoring," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 16(3), pages 425-451, July.
  2. Flaxio Toxvaerd, 2005. "Mergers, Diversification and Financial Intermediation," Money Macro and Finance (MMF) Research Group Conference 2005, Money Macro and Finance Research Group 43, Money Macro and Finance Research Group.
  3. Yoonhee Tina Chang, 2004. "Relationship Banking in Bilateral Oligopoly and Asymmetric Information," Econometric Society 2004 Far Eastern Meetings, Econometric Society 734, Econometric Society.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:hhs:rbnkwp:0131. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lena Löfgren).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.