We study the role played by the informal links, or “connections,” between the chief executive officer (CEO) and the divisional managers of conglomerate organizations. We show that segments run by connected managers receive more investment and exhibit lower sensitivity to cash flow shortfalls (and exhibit higher sensitivity to other segments’ cash flow). At the firm level, having more connected managers presiding over segments with high Tobin’s Q improves resource allocation and increases firm value.
GASPAR, J.M. et MASSA, M. (2011). The Role of Commonality Between CEO and Divisional Managers in Internal Capital Markets. Journal of Financial and Quantitative Analysis, 46(3), pp. 841-869.