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International Business

From Big to Small: the relative size effect on corporate capital allocations

Dr David Bardolet, Dept. of Management and Technology, Bocconi University

28th Feb 2013  12:00 pm - 01:30 pm Meeting Room 7, Darlington Centre


Building on previous studies of corporate capital allocations, we investigate the effect of the relative size of a business unit with respect to the size of the rest of the corporation on internal investment behaviour. Using field data from a large set of firms we find that business unit capital expenditures normalized by assets are higher when a business unit is smaller relative to the rest of its firm, holding other relevant variables (growth, profitability, etc.) constant. Our analysis extends findings of inefficiencies in capital allocation decisions in a novel direction by suggesting that corporate cross-subsidization is 1) mostly centred around reallocation of capital from large to small business units rather than from high to low performing business units as predicted by the agency-based accounts and 2) due to a simple heuristics that leads managers to naively diversify their allocations in favour of small units. Furthermore, we find no moderating effect of increased managerial ownership on the observed cross-subsidization from bigger to smaller units which leads us to the claim that existing agency-based explanations of cross-subsidization in the finance literature cannot readily explain the relative size effect. We also find a negative effect on performance in firms with larger dispersion of size among their units.


David Bardolet is an Assistant Professor in the Department of Management and Technology at Bocconi University in Milano, Italy. He has a Ph.D. in Management from the University of California Los Angeles. Recently, he has been developing the basic elements of a comprehensive theory of the micro-foundations of firm resource allocation, with a particular focus on capital investment. In his papers, he explores how managing the capital allocation process can become a key dynamic capability for firms. Furthermore, he investigates how simple heuristics and biases influence investment decisions as well as the measures that can be taken to moderate those biases. In essence, his work aims at further developing a theory of firm dynamic capabilities that is grounded on managerial cognition and its interaction with organizational structure.


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