Boundary of the firm with endogenous firm structure

Ma, Qing; Wang, Susheng

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.

Citation

Ma, Q., & Wang, S. (2022). Boundary of the firm with endogenous firm structure. Journal of Financial Research, 45(4), 797-816. https://doi.org/10.1111/jfir.12298

• Journal Article Type: Article
• Acceptance Date: Jul 11, 2022
• Online Publication Date: Aug 4, 2022
• Publication Date: Dec 8, 2022
• Deposit Date: Jul 27, 2022
• Publicly Available Date: Aug 5, 2024
• Journal: Journal of Financial Research
• Print ISSN: 0270-2592
• Electronic ISSN: 1475-6803
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 45
• Issue: 4
• Pages: 797-816
• DOI: https://doi.org/10.1111/jfir.12298
• Keywords: Finance; Accounting
• Public URL: https://nottingham-repository.worktribe.com/output/9404958
• Publisher URL: https://onlinelibrary.wiley.com/doi/abs/10.1111/jfir.12298
• Additional Information: This is the peer reviewed version of the following article: Ma, Q. and Wang, S. (2022), Boundary of the firm with endogenous firm structure. The Journal of Financial Research. Accepted Author Manuscript, which has been published in final form at https://doi.org/10.1111/jfir.12298.