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RFS Advance Access originally published online on October 15, 2003
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Rev Fin 2004; 17:99-128
© 2004 The Society for Financial Studies

Career Concerns and Resource Allocation in Conglomerates

Anand Mohan Goel
New York University

Vikram Nanda
University of Michigan

M. P. Narayanan
University of Michigan

Address correspondence to M. P. Narayanan, University of Michigan Business School, Ann Arbor, MI 48109-1234, or e-mail: mpn{at}umich.edu.

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.


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