Informational costs and benefits of creating separately identifiable operating segments

Frank Gigler, Thomas Hemmer

Research output: Contribution to journalArticlepeer-review

14 Scopus citations

Abstract

We provide an informational theory for how the ownership claims to a firm might be structured. When the market price of equity provides valuable contracting information there is a benefit to creating separate ownership claims to each of a firm's divisions. However, creating this information also generally has adverse incentive effects because it enriches the agent's strategy space. We show in a complete contracting setting that under a large class of agencies the firm is strictly better off bundling the ownership claims to divisions that are sufficiently similar and creating separate ownership claims only to divisions that are sufficiently different.

Original languageEnglish (US)
Pages (from-to)69-90
Number of pages22
JournalJournal of Accounting and Economics
Volume33
Issue number1
DOIs
StatePublished - Mar 7 2002

Keywords

  • Contracting
  • Core competency
  • Tracking stock

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