Organizational structure, agency theory, and capital allocation

The first chapter of this dissertation analyzes a new data set to determine the effect of employment composition (managers, office staff, salesforce, white collar workers, and blue collar workers) on financial performance (profit margin, return on assets, Tobin's Q, and stock returns). I find that a high percentage of either managers or office staff leads to lower performance in every financial category. Results are strengthened when the data set is segmented into high and low growth firms. Drivers of composition are also tested. Large firm size leads to a high percentage of managers and office staff, whereas debt restricts growth in these areas.; The second chapter analyzes a group of managers asked to evaluate a set of projects. Although the managers can ordinally rank the projects they are given, they are unable to determine the proper accept/reject cutoff. I find rank order problems are more likely to occur with low project variance, high project correlation, high levels of noise, and noise which is negatively correlated across projects. As the number of projects required to evaluate increases, that manager loses the ability to rank projects properly. The firm can hire additional managers. Yet, without the ability compare rankings across managers, new aggregation inefficiencies will occur. Aggregation inefficiencies are solely functions of group size and the total number of projects. They are independent of project value and noise parameters.; In traditional agency models the principal hires a lead manager (CEO) to exert effort, which in turn directly affects the distribution of cashflows. Conversely, in the third chapter, the manager creates value through project selection, not through effort. Although the investment decision is seen by all, the project's characteristics are known only to the manager. We find the optimal managerial ownership is positively related to the variance of unknown overinvestment tendencies. Conversely, ownership is inversely related to project uncertainty, investment size, and risk aversion. Finally, ownership is not always continuous. As ownership rises, new project value drops. When project value drops to zero, ownership will also drop to zero. The firm will choose to fix its capital budget, eliminating manager discretion.