Abstract
This study investigates the determinants and consequences of the efficiency of resource allocation in multibusiness firms. We find that greater cognitive diversity among top and division managers is associated with decreased resource allocation efficiency. When diversity is greater top managers find it more difficult to verify the value benefits of resource allocation proposals and are more likely to be swayed by influence activities of divisional managers. However, performance based compensation incentives for divisional managers appear to counter this negative effect, and act to reduce the sensitivity of resource allocation efficiency to cognitive diversity. Lastly, there is strong evidence that higher resource allocation efficiency is related to higher stock market performance.
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