P828_Corporation_Finance - Integration Organizational...

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Integration, Organizational Processes and Allocation of Resources Oguzhan Ozbas November 2003 Abstract Does the level of integration of a f rm a f ect the quality of information available to its top decision makers responsible for allocating resources? Motivated by the pervasiveness of speci f c knowledge in large multi-division f rms, I develop a model of internal competition for corporate resources among specialist managers and show that: (i) managers of integrated f rms exaggerate the payo f s of their projects to obtain resources despite potentially adverse career consequences, and (ii) the exaggeration problem worsens with increased integration and reduces the allocative e ciency of an integrated f rm. Control rights based on asset ownership enable the f rm to set “the rules of the game” and improve managerial behavior through organizational processes such as rigid capital budgets, job rotation, centralization and hierarchies. Marshall School of Business, University of Southern California. I am grateful to my advisors Sendhil Mul- lainathan, David Scharfstein (Chairman) and Antoinette Schoar for their encouragement, thoughtful advice and many helpful discussions throughout my dissertation. I thank an anonymous referee, Harry DeAngelo, Linda DeAn- gelo, John Matsusaka and Ján Zábojník for their comments. I have also bene f ted from the comments of Bob Gibbons, Tom Gilligan, Denis Gromb, Bengt Holmström, Simon Johnson, Tony Marino, Kevin Murphy, Jeremy Stein, Jean Tirole, Eric Van den Steen, Andrew von Norden F ycht, Mark Wester f eld, and seminar participants at HBS, MIT, University of Illinois at Urbana-Champaign, University of Michigan, University of Minnesota, USC, and UT Austin. Financial support from the Walter A. Rosenblith Fellowship Fund and the Marshall General Research Fund are gratefully acknowledged.
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To assume all the knowledge to be given to a single mind is to assume the problem away andtod isregardeveryth ingthatisimportantands ign i f cant in the real world. F. A. Hayek 1I n t r o d u c t i o n An often overlooked fact in the current debate surrounding corporate reform is that 30 percent of the individuals accused of perpetrating fraud by the SEC are subsidiary corporation executives — managers who are lower down in the organization than the CEO and the CFO. Presumably such dishonest managerial conduct at lower levels is just as damaging to allocative e ciency and welfare as misrepresentations made by those at the very top. Yet our understanding of the former, asymmetric information within the f rm, is much less advanced than our understanding of the latter, asymmetric information between the market and the f rm, developed by corporate f nance research in the last thirty years. Why do internal controls intended to prevent deceptive managerial conduct in the f rst place fail at a seemingly greater frequency at larger integrated companies?
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P828_Corporation_Finance - Integration Organizational...

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