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| Author: | Bethel, J. E. Liebeskind, J. P. |
| Title: | Diversification and the legal organization of the firm |
| Journal: | Organization Science
1998 : JAN-FEB, VOL. 9:1, p. 49-67 |
| Index terms: | DIVERSIFICATION ORGANIZATIONAL STRUCTURE SUBSIDIARY COMPANIES |
| Language: | eng |
| Abstract: | There is a considerable variation in the legal organization of diversified firms: while some of them are organized as simple corporations, many are organized as "corporate groups" in which certain lines of business are organized as separate, subsidiary companies. This study argues that the variation in legal organization is observed because legal organization can significantly affect firm value. Forming subsidiary firms to accommodate new businesses can protect the outstanding stakeholders of a diversified firm from increases in bankruptcy risk and liability exposure. Forming subsidiary firms also reduces economies of scope. Hence, there are offsetting costs and benefits to adopting different types of legal organization. Changes in these can also be expected to trigger changes in legal organization. |
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