Division Managers’ Private Information and Capital Investment Efficiency: Exploiting External Social Connections as an Information Source

Abstract

We examine the relation between division-level information and capital investment in conglomerates, exploiting the external social connections of division managers (DMs) as an information source. We find that investment efficiency, proxied by investment sensitivity to relative divisional investment opportunities, is higher for divisions whose DMs are socially connected with the CEOs of industry peers than divisions without such connections. This effect is stronger when headquarters are more likely to delegate decisions (proxied by larger information distances between headquarters and the divisions and by greater division operational uncertainties), when the DMs’ information source is more useful (proxied by the closeness of DMs’ external social connections and the information quality from the connected external CEOs), and when the DM has greater influence in the conglomerate. Further, connected divisions exhibit higher profitability in the subsequent years than unconnected divisions. Our study sheds light on how division-level information influences internal capital allocation and performance.