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Location of Decision Rights Within Multinational Firms

Authors


  • Accepted by Philip Berger. We thank an anonymous referee for comments and guidance. We also thank Andrew Bernard, Jennifer Blouin, Paul Danos, Paul Fischer, Vijay Govindarajan, Ian Gow, Jon Lewellen, Venky Nagar, Scott Neslin, Margaret Peteraf, Scott Richardson, Jonathan Rogers, Cathy Schrand, Robert Verrecchia, workshop participants at the Indiana University, New York University, Tuck School of Business, University of Pennsylvania, and the University of the Witwatersrand, as well as participants at the 2010 European Accounting Association, 2010 American Accounting Association annual meetings, 2011 Colorado Summer Accounting Conference, 2012 University of Toronto Accounting Research Conference, and 2012 Keizai Koho Center Symposium for helpful comments. The statistical analysis of firm-level data on U.S. multinational firms was conducted at the International Investment Division, Bureau of Economic Analysis under arrangements that maintain legal confidentiality requirements. The views expressed are those of the authors and do not reflect official positions of the U.S. Department of Commerce. This research was not the result of a for-pay consulting relationship and our employer does not have a financial interest in the topic of the paper, which might constitute a conflict of interest.

ABSTRACT

Using U.S.-based multinational firm data gathered over more than two decades, we examine factors associated with the location of decision rights within these firms, whether the inappropriate assignment of decision rights is associated with poor firm performance, and whether these firms relocate decision rights in response to their evolving environments. We find that a mismatch between the location of decision rights and a firm's environment is associated with weak firm performance. We also show that the likelihood a parent company will alter the assignment of decision rights to a subsidiary is increasing in the extent of a mismatch although this likelihood is decreasing in the strength of the subsidiary's performance.

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