Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/82403
Authors: 
Cerasi, Vittoria
Daltung, Sonja
Year of Publication: 
2001
Series/Report no.: 
Sveriges Riksbank Working Paper Series 131
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.
Subjects: 
Conglomerates
Delegation
Diversification
Monitoring
JEL: 
D23
D82
G20
G32
L22
Document Type: 
Working Paper

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