| This dissertation investigates the efficiency of the allocation (transfer) of capital resources within multibusiness firms. Allocation is efficient if resources flow from investment opportunities with poor prospects toward investment opportunities with brighter---shareholders' value creating prospects. The key question that motivates the dissertation is under what conditions is internal resource allocation efficient?.;I assume that resource allocation is a bargaining process among divisional managers. I propose and test a model that links value creation in internal resource allocation to information and managerial incentives. I argue that there is information asymmetry between divisional managers and top managers with respect to investment opportunities faced by divisions. The level of information asymmetry and, in turn, resource allocation efficiency, are determined by the interplay of dissimilarity in managerial specializations and managerial incentives.;I test my model using data from COMPUSTAT, ExecuComp, BLS and CRSP. The heteroskedasticity robust OLS estimate of the model is largely consistent with my hypotheses. I find that dissimilarity in specializations between top managers and divisional managers have a negative impact on resource allocation efficiency. On the other hand, high-powered incentives for divisional managers, (a) have a direct and positive impact on resource allocation efficiency, and (b) reduce the sensitivity of resource allocation efficiency to dissimilarity in managerial specializations. High-powered incentives for the CEO have no impact on resource allocation efficiency. These findings are robust to controls for firm diversity and size, outliers in the data and sample selection.;The findings suggest two main conclusions: First, when optimality of a decision depends on exchange of information between specialists, and when there is some sort of competition between these specialists, differences in specializations could negatively affect efficiency of decisions in the absence of high powered incentives for specialists. This provides a qualification for the simple notion that specializations within an organization leads to higher efficiency. Second, behaviors on the part of divisional managers put a significant constraint on the actions by top management. This suggests that from an agency perspective, the actions taken by top management can better be understood if the constrain from middle management is accounted for in the analysis. |
