Corporate Delegation of Decision Rights and Firm Performance

Despite the importance of internal decision-making for corporate outcomes, we know little about the role of within-firm delegation of decision rights. We use confidential survey data from manufacturing firms to examine whether the extent to which decision rights are delegated from central headquarters to local plant managers is associated with firms’ financial performance. While firms’ overall level of delegation is unassociated with performance, the extent of delegating employee hiring and customer-related sales and marketing decisions is positively associated with financial performance, consistent with delegation being more beneficial when decisions rely on local tacit information that is difficult to transfer to headquarters. In contrast, greater delegation of capital investment and new product introduction decisions is negatively associated with financial performance, consistent with delegation being costly when decisions require centralized coordination and oversight. Cross-sectional tests provide evidence that information transfer frictions, the value of local knowledge, agency conflicts, and the economic importance of the decision delegated moderate the relation between firm performance and delegation of certain types of decisions in expected ways. Collectively, our findings demonstrate that the relation between decision rights delegation and financial performance does not follow a “one size fits all” model, consistent with delegation not being a monolithic governance choice.