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The hand of corporate management in capital allocations: patterns of investment in multi- and single-business firms

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  • David Bardolet
  • Dan Lovallo
  • Richard Rumelt

Abstract

One of Chandler's basic insights was that the new organizational structures adopted after the 1920s reflected a specialization of the roles of business and corporate managers. Business managers coordinated functions and corporate managers allocated resources. This article studies the impact of corporate management on capital allocation decisions by comparing investment behavior in multi- and single-business companies. Using a new taxonomy to control for the quality of each business unit, we analyze a cross-sectional sample of U.S. companies and identify a number of empirical regularities that highlight the allocative decisions of corporate management. In particular, we find that, when dealing with cash-needy businesses, multi-business firms invest more intensively in those that are less profitable. We find no evidence that this subsidy results in a higher success rate in making those businesses profitable over time. We suggest a number of explanations for this empirical pattern. Copyright 2010 The Author 2010. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved., Oxford University Press.

Suggested Citation

  • David Bardolet & Dan Lovallo & Richard Rumelt, 2010. "The hand of corporate management in capital allocations: patterns of investment in multi- and single-business firms," Industrial and Corporate Change, Oxford University Press, vol. 19(2), pages 591-612, April.
  • Handle: RePEc:oup:indcch:v:19:y:2010:i:2:p:591-612
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    File URL: http://hdl.handle.net/10.1093/icc/dtq007
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    Cited by:

    1. Francesco Bogliacino & Mario Pianta, 2016. "The Pavitt Taxonomy, revisited: patterns of innovation in manufacturing and services," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 33(2), pages 153-180, August.
    2. Emilie R. Feldman, 2016. "Corporate Spin-Offs and Capital Allocation Decisions," Strategy Science, INFORMS, vol. 1(4), pages 256-271, December.
    3. Hanousek, Jan & Kočenda, Evžen & Shamshur, Anastasiya, 2015. "Corporate efficiency in Europe," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 24-40.

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