Investment horizon and the structure of organizations: Essays in the theory of the firm.

Abstract

This dissertation is composed of two parts. The first part is: Investment Horizon And The Market For Corporate Control: The Defensive Role Of Long-Term Investments. The relationship between managers' investment choice and takeover pressure has triggered intense debate since the mid 80's, yet the issue remains unresolved. In this part of the research, we view investment horizon choice as a strategic move that puts target management in a better position in an anticipated future takeover contest. Our insight is that managers interested in retaining control may prefer long-term investments because the high uncertainties associated with these investments increase the expected takeover prices, thereby reducing the takeover probabilities. This finding is in a sharp contrast to the result of most existing theories and to the common wisdom that takeover pressure induces myopic behavior. Nevertheless, it is consistent with empirical evidence. Our analyses generate testable predictions that can be used to further clarify the issue. The second part of the thesis is: Organization Structure And Wage Contract Under Different Economic Environments. The part of the research attempts to shed insights on how economic environments affect firms' organization and wage contract design. Although utilizing the same production technology, firms can have significantly different corporate structures depending on the economic environment they reside in. In a rigid economy where labor mobility is restricted, firms' organization structures simply mimic the technology structure. Hierarchies are set to only to facilitate the productions. Wage contracts are long-term and flat. So, wages are non-rank and non-performance based. However, in a flexible economy where labors are free to switch firms, workers are concerned about visibilities of their performances due to the outside opportunities. Therefore, organization and wage structures in the flexible economy serve an extra purpose---signaling. We show, in the flexible economy, there exist non-functional ranks, ranks that are set not due to the production needs, but to signal workers' performances, and wages become contingent to ranks and performances.