Organizational Prospects, Influence Costs and Ownership Changes

Organizational Prospects, Influence Costs and Ownership Changes

By Paul R. Milgrom, John Roberts, Margaret Meyer
1991Working Paper No. 1181

We augment efficiency-based theories of ownership by including influence costs. Our principal conclusion is that the prospect of organizational decline and layoffs creates additional influence costs in multi-unit organizations that would be absent if there was no prospect of layoffs and would be lessened or eliminated in focused organizations. This helps explain the tendency of firms to divest poorly performing units, as well as the pattern of sales of such units to firms already in businesses related to that of the divested unit.