R & D in stand-alone firms and conglomerate divisions

Finance

IFA Working Paper

2000

This paper examines differences in research and development intensity between stand-alone firms and conglomerate divisions. In the process, two main goals are accomplished: first, the data are consistent with a model of R&D management based on the assignment of property rights; second, the data provide additional insights into the current debate about the costs and benefits of the conglomerate organizational form as a corporate governance structure. In a 12-year panel of US stand-alone and multidivisional firms, R&D intensity inside stand-alone firms is significantly greater than in conglomerate divisions. As property rights in conglomerates rest with headquarters and not the divisions themselves, this is consistent with theoretical models which make predictions about property rights allocations when investments (like R&D) lead to non-contractible outcomes. Furthermore, the evidence indicates that conglomerate divisions may be more prevalent when R&D intensity in an industry is low. This finding indicates that the choice of belonging to a conglomerate (as opposed to being a stand-alone firm) is endogenous. Based on the findings, the implications for the current debate over the benefits and costs of conglomeratization are discussed.

Institute of Finance and Accounting

FIN 316

IFA Working Paper

No