The Transmission of Economic Shocks in Multidivisional Organizations: An Empirical Analysis of the Global Retail Industry

Abstract

Capital allocation research has long argued that divisions of multidivisional organizations may be relatively advantaged compared with standalone firms when external capital markets are less efficient. As a complement to this literature that largely focuses on deficiencies in the supply of external capital, we theorize about the effects of disruptions to internal capital markets. More specifically, we explore the impact of parent-level financial shocks on the growth of divisions. We first argue that the effects of a crisis in a parent country disrupt the supply of internal capital available to foreign divisions, resulting in significantly reduced asset growth in these divisions. Next, we offer an initial step toward developing comprehensive understanding of the contextual influences that may intensify or attenuate the effect of shocks by theorizing a broad set of moderators that consider the parent level, parent-division linkages, and the division level within multidivisional organizations. Analyses of 1,968 geographic divisions of multinational retailers across 92 host countries show that effects of parent financial crises on division investment depend on factors influencing the degree of parent exposure, shock transmission, and division adaptability. Funding: This work was supported by the Ministerio de Ciencia, Innovación y Universidades [Grants PID2020-115660GB-I00 and RYC2022-036434-I]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2022.16521 .