Abstract
Centralization has been regarded as an important factor in corporate governance in the academic and business communities. Although several studies have examined the relationship between centralization and firm performance, the conclusions remain mixed. We extend existing research by introducing firm size as a threshold variable into our model to explicate the complicated effects of centralization on firm performance. We found that a high degree of centralization can promote firm performance significantly in small- and medium-scale firms while inhibiting firm performance in large-scale firms. Using heterogeneity analysis, we found that centralization has a more significant positive impact on firm performance in private firms, family firms, and manufacturing firms than others. Furthermore, we explored the factors influencing the nexus between centralization and firm performance and found that centralization can improve the level of cost allocation management and technology innovation, driving firm performance but possibly resulting in overinvestment, which is harmful to firm performance. Our research provides guidance for companies to establish a decision-making power allocation that meets their scale-appropriate development needs.
Highlights
On the one hand, centralized management can coordinate enterprise resources to play a positive role in the internal market to improve the management efficiency of current enterprise resources
We find that there is a size-threshold effect on the centralization and firm performance nexus; that is, a high degree of centralization can significantly promote firm performance in small- and medium-scale enterprises but has no significantly positive impact on firm performance in large-scale firms
We investigate the factors influencing the previously unstudied centralization and firm performance nexus and explore how centralized management can improve corporate governance to promote firm performance and find that centralization can improve the level of cost allocation management and technology innovation to drive firm performance but may result in overinvestment, which is harmful to firm performance
Summary
Centralization has attracted attention in academia [1]. The definition of corporate centralization is the degree to which corporate authority is concentrated at the top of an organizational structure [2]. Decentralization has a positive influence on the use of a combination of decision-making power and exclusive knowledge to enact specific management, where managers might cause overinvestment, which is potentially harmful to firm performance because of a lack of sufficient professional knowledge and effective limitations [3]. Based on these studies, we can conclude that it is essential for enterprises to weigh the degree of centralized management and the separation of centralization in corporate governance.
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