Hierarchies and markets

Abstract

Whereas previous empirical studies have found performance gains from the adoption of multidivisional organization in U.S. and U.K. companies, this paper reports a reduction in profitability for German M-form firms for several years following reorganization, with no sign of an eventual positive gain. These results emerge from a cross-section analysis of 48 among the top 100 German companies. We suggest the constrasting results may flow from certain legal and institutional features, not present in the U.S. and U.K., attenuating potential gains and enlarging short-run transactions costs. These include the role of the banks, the relative concentration of shareholdings and the dual system of company boards.