Principal Investigator Bengt Hölmstrom
The pace of corporate restructuring has accelerated since the mid 80's. The casual evidence points to benefits from increased disaggregation. As the business press and business gurus praise the virtues of flatter hierarchies, worker empowerment and focus on core competencies, hard evidence concerning the economic benefits of disaggregation remains relatively sparse. The best evidence is indirect evidence from the stock market. The unprecendented level of M-and-A activity during the 80's and 90's as well as the exceptional increase in Tobin's q (the ratio of a firm's market value to the replacement value of its assets), from a traditional average of about 1.0 to the current level of 3.5, strongly suggest that significant economic forces underlie the extensive restructuring that we are observing. The purpose of this project is to identify these economic forces and to study how they have played themselves out in different industries and regions. By focusing on the economic forces behind organizational change, this project aims at helping managers to separate passing organizational fads from innovations of lasting value, and most importantly, to decide which changes are relevant for a given line of business in a given set of circumstances.
Currently, three major hypotheses are under investigation:
(1) After the 60's conglomerization and empire building, financial markets finally intervened to discipline management prone to excessive diversification. The increased influence of financial capital has come in part from the build-up of pension assets.
(2) New technologies, most importantly IT, have reduced the economic value of tangible assets relative to human assets. As human capital becomes less dependent on ownership of physical assets and of financial capital, it becomes relatively more costly and less desirable to keep diverse activities within a single firm.
(3) National deregulation and globalization have opened up vast new markets, allowing scarce corporate resources -- financial and human -- to be redeployed in higher value acitivities (core businesses).
These hypothesis lead to very different conclusions about the future course of industries and the appropriate actions that firms should take. They also lead to distinct research agendas. Hypothesis (1) raises questions about the role of internal capital markets relative to external markets; how far should one (and can one) decentralize corporate funding and how should one evaluate financial responsibility? Hypothesis (2) leads to a reassessment of the value of the corporation as a coordinator and how internal governance -- the information, control and incentive systems -- should be structured given the increased importance of knowledge and talent. Hypothesis (3) leads one to ask what mechanisms (alliances, joint ventures, contracts, etc) can be used to control external relationships in different circumstances. It also suggests the possibility that many of these organizational innovations are temporary and may be reversed either with changes in the regulatory climate or as the rush to enter new markets subsides.