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Boundary of the firm with endogenous firm structure

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  • Qing Ma
  • Susheng Wang

Abstract

We study the boundary of the firm with endogenous firm structure. The firm has two restructuring options: internal restructuring by which the firm centralizes or decentralizes decision making, or external restructuring by which the firm spins off a division. We investigate the firm's restructuring options to determine its boundary based on the optimal firm structure. Our conclusion depends on market uncertainty, market size, market competition, synergy among divisions, and coordination costs. We find that when market uncertainty rises, a decentralized firm (D‐firm) conducts internal restructuring, whereas a centralized firm (C‐firm) conducts external restructuring. A D‐firm chooses to stay put when market competition intensifies, whereas a C‐firm chooses to conduct either internal or external restructuring depending on whether a positive synergy exists among its divisions.

Suggested Citation

  • Qing Ma & Susheng Wang, 2022. "Boundary of the firm with endogenous firm structure," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(4), pages 797-816, December.
    • Handle: RePEc:bla:jfnres:v:45:y:2022:i:4:p:797-816
    DOI: 10.1111/jfir.12298
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    References listed on IDEAS

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