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Career Concerns and Resource Allocation in Conglomerates

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  • Anand Mohan Goel

Abstract

We investigate resource allocation decisions in conglomerates when managers are motivated by career concerns. When divisional cash flows are differentially informative about managerial ability, we show that it is in the managers' interest to overallocate unobservable intangible resources to the more informative divisions. Anticipating this bias, it is optimal for the firm's owners to also overallocate observable capital to the more informative divisions. The model provides rationale for corporate socialism and corporate hedging. It also highlights a cost of segment reporting and tracking stocks, namely, that they allow managers to distort their perceived ability at the expense of investors. Copyright 2004, Oxford University Press.

Suggested Citation

  • Anand Mohan Goel, 2004. "Career Concerns and Resource Allocation in Conglomerates," The Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 99-128.
    • Handle: RePEc:oup:rfinst:v:17:y:2004:i:1:p:99-128
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    File URL: http://hdl.handle.net/10.1093/rfs/hhg043
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    Cited by:

    1. Suman Banerjee & Thomas H. Noe, 2017. "Legal-System Arbitrage and Parent–Subsidiary Capital Structures," Management Science, INFORMS, vol. 63(11), pages 3809-3828, November.
    2. Chi, Yung-Ling, 2022. "Owners’ portfolio diversification and internal capital allocation," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).
    3. Khoroshilov, Yuri & Narayanan, M.P., 2008. "The role of profit-based and stock-based components in incentive compensation," Journal of Financial Intermediation, Elsevier, vol. 17(3), pages 357-378, July.
    4. García-Pérez-de-Lema, Domingo & Ruiz-Palomo, Daniel & Diéguez-Soto, Julio, 2021. "Analysing the roles of CEO's financial literacy and financial constraints on Spanish SMEs technological innovation," Technology in Society, Elsevier, vol. 64(C).
    5. Li, Xiaoyang & Low, Angie & Makhija, Anil K., 2011. "Career Concerns and the Busy Life of the Young CEO," Working Paper Series 2011-4, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    6. Hoang, Daniel & Gatzer, Sebastian & Ruckes, Martin E., 2018. "The economics of capital allocation in firms: Evidence from internal capital markets," Working Paper Series in Economics 115, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    7. Li, Xiaoyang & Low, Angie & Makhija, Anil K., 2017. "Career concerns and the busy life of the young CEO," Journal of Corporate Finance, Elsevier, vol. 47(C), pages 88-109.
    8. Bernardo, Antonio E & Luo, Jiang & Wang, James J.D., 2005. "A Theory of Socialistic Internal Capital Markets," University of California at Los Angeles, Anderson Graduate School of Management qt29x1966g, Anderson Graduate School of Management, UCLA.
    9. Bernardo, Antonio E. & Luo, Jiang & Wang, James J.D., 2006. "A theory of socialistic internal capital markets," Journal of Financial Economics, Elsevier, vol. 80(3), pages 485-509, June.
    10. Gatzer, Sebastian & Hoang, Daniel & Ruckes, Martin, 2014. "Internal capital markets and diversified firms: Theory and practice," Working Paper Series in Economics 64, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    11. Kim, Doyoung, 2017. "Motivating for new changes when agents have reputation concerns," Journal of Economic Behavior & Organization, Elsevier, vol. 137(C), pages 37-53.
    12. Gatzer, Sebastian & Hoang, Daniel & Ruckes, Martin, 2015. "Internal Capital Markets and Diversified Firms: Theory and Practice," EconStor Preprints 169432, ZBW - Leibniz Information Centre for Economics.

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