Division Managers’ Private Information and Capital Investment: Exploiting External Social Connections as an Information Source
Division Managers’ Private Information and Capital Investment: Exploiting External Social Connections as an Information Source
Date
2022
Authors
Luo, Shuqing
Wang, Xin
Wu, Qiong
Zhang, Guochang
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We examine the relationship between division-level information and capital investment in conglomerates, exploiting the external social connections of division managers (DMs) as an information source. We find that DMs who are socially connected with the CEOs of industry peers undertake more investment than those without such connections. The documented effect is stronger when (i) the DM’s information source is more useful, proxied by connected external firms having superior performance, high growth, large market shares, or experienced CEOs; (ii) the industry environment is more uncertain and less transparent; and (iii) the DM is more influential within the conglomerate. Along with increased investment, connected divisions display greater responsiveness to investment opportunities and subsequently realize higher profitability. Overall, division-level information helps improve capital investment decisions despite exacerbated information asymmetries.
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Social connection,
Divisional capital investment,
Conglomerate firm,
Capital allocation,
Investment efficiency
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