Brilliant But Neglected II

25 July 2007 at 11:01 pm Leave a comment

| Peter Klein |

Some suggestions for Nicolai’s list:

John G .Matsusaka, “Corporate Diversification, Value Maximization, and Organizational Capabilities,” Journal of Business 74 (July 2001): 409-31. Offers a novel and provocative “match-seeking” theory of diversification in which firms do not know their own capabilities but must discover them by experimenting with various combinations of business units. A diversified firm may be valued at a discount relative to more specialized firms because its current lines of business include some not consistent with its capabilities, but such conglomeration is necessary, and value-creating in the long run, if the firm is to discover where it should eventually refocus. 85 hits on Google Scholar. Possibly neglected because it appeared in the Journal of Business near the end of its run.

Robert C. Ellickson, “A Hypothesis of Wealth-Maximizing Norms: Evidence from the Whaling Industry,” Journal of Law, Economics, and Organization 5, no. 1 (Spring 1989): 83-97. A nice example of the emergence of private law, focusing on the rules governing property rights in whales prior to the twentieth century. Without a central authority the whaling community — a small, close-knit group with shared characteristics and frequent interaction — developed a complex set of norms enforced by community sanction and the threat of ostracism. Just 25 Google Scholar hits.

Douglas W. Allen and Dean Lueck, “The Nature of the Farm,” Journal of Law and Economics 41, no. 2 (October 1998): 343-86. More than just a clever title — a careful and convincing explanation for an organizational puzzle, namely the persistence of the family farm. While virtually every other mature industry is dominated by corporate ownership, agriculture continues to be populated by small, family-owned firms. Allen and Lueck argue that family ownership results from agriculture’s unique combination of seasonality and random variation, which makes it difficult to design and enforce effective incentive contracts that mitigate moral hazard. Instead, sole proprietorships, with the farmer or farm family as residual claimant, outperform joint ownership arrangements, such as corporations. 87 hits on Google Scholar.

Amar Bhide, “Reversing Corporate Diversification,” Journal of Applied Corporate Finance 3, no. 2 (Summer 1990): 70-81. An insightful explanation for changes in firm boundaries from the 1960s to the 1990s, focusing on the development of external managerial capabilities. Chandler and Williamson showed that the rise of the vertically integrated corporation in the early 20th century could be interpreted as the solution to a transaction cost problem; by consolidating operating units into a single corporate entity, the operating units could “outsource” managerial functions (in particular, long-run strategy and procurement of external finance) to the corporate office, focusing their own energies on operations (according to their “core competencies,” as we would say today). This approach peaked in the conglomerate period of the 1960s, with the corporate offices of conglomerates functioning basically as consulting firms for their operating units. Bhide describes how corporate refocusing in the 1980s and 1990s coincided with the rise of independent consulting firms which performed for their clients many of the same functions previously provided by the conglomerate headquarters. The paper reminds us that firm boundaries depend not on the absolute efficiency of internal processes (such as internal capital markets) but on the relative efficiency of internal and external (market) processes. Just 61 Google Scholar hits, possibly because the JACF is perceived in some quarters as a practitioner-oriented journal rather than a “real” scholarly publication.

Entry filed under: - Klein -, Evolutionary Economics, Recommended Reading, Strategic Management, Theory of the Firm.

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