Chapter

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

David Bardolet, Dan Lovallo and Richard Rumelt

in Management Innovation

Published in print March 2012 | ISBN: 9780199695683
Published online May 2012 | e-ISBN: 9780191738265 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199695683.003.0012
The hand of corporate management in capital allocations: patterns of investment in multi- and single-business firms

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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 chapter 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 US 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.

Keywords: capital allocation; corporate strategy; investment; behavioral decision-making

Chapter.  8984 words.  Illustrated.

Subjects: Innovation

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