Abstract
The resource allocation literature has shown that multi-business firms exhibit a harmful inertia in their headquarters-level resource allocation to strategic business units. Drawing on the concept of private information, we develop and test theory of why some multi-business firms have a stronger tendency to inertia in their resource allocation than others. The results indicate that firms with high levels of unrelated diversification act less dynamically in adjusting their capital resource allocation. In addition, our findings indicate that under conditions of high environmental dynamism, difficulties in detecting the need for change are reduced, which lowers a diversified firm’s risk of inertia in resource allocation. Further, firms with experience with strategic agility and greater resource availability have less difficulty in using their private information to detect the need for adjustments in resource allocation.
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