Three essays on firm boundaries: Technology, uncertainty, and agency

If markets are powerful and effective mechanisms for allocating resources, why do we observe so much economic activity inside formal organizations? And what derives the changes in the boundaries of those organizations? Although the economic research has come a long way to find some answers to these questions, the quest remains mostly incomplete. This dissertation is an attempt to fill some important gaps in our understanding of the factors that shape the size and scope of the firms. The thesis of the three sequential papers is that the structure of power and information within companies, and the interaction of that structure with the investor sentiment, can have significant implications for expansionary investments. I argue that particular trends and beliefs about an elusive concept called "synergy" can explain an important part of the changes in firm boundaries we observe in the economy.; I start by investigating the effect of size and scope of firms on the production and acquisition of technological knowledge. I analyze the innovation rate of the firms in the computer industry as a function of their alliance relations and their technological scope. The empirical evidence on R&D productivity suggests that expansion of firm boundaries can help to increase the innovative performance. Therefore, production and diffusion of technology can be a part of the "synergies" gained by wider firm boundaries.; The analysis of the mergers and acquisitions trends; however, show that the supposed gains by the expansion of firm boundaries can be subject to serious speculative errors and agency costs especially in bullish times. Over-optimist expectations in the financial markets would result in over-investment because of their interaction with managerial private interests. The analysis of the relation of investor sentiment with corporate acquisitions shows us that the firm boundaries may change significantly by the noisy expectations in the financial markets.; The results of the three essays have immediate ramifications for the policies related to corporate governance and corporate strategy.