Managerial Decisions, Internal Organization Structure, And Agency Considerations

Abstract

This paper deals with issues related to productive inefficiencies that occur at a divisional level of a multinational firm. More specifically, the paper introduces an additional consideration in the agency relationship, namely, the internal organization structure. It is argued that the internal organization structure imposes restrictions on the behavior of divisional managers resulting in financial decisions characterized by short-term orientation and risk aversion. These suboptimal financial decisions generate organizational costs, called managerial regulatory costs, which should be distinguished from agency-type costs.