Periphery, Overlap, and Subunit Exit in Multiunit Firms: A Subunit Power Perspective

Abstract

Existing studies on subunit power largely rely on the premise that a firm’s subunits are connected through resource exchanges. In this study, we introduce two novel constructs—market periphery and market overlap—to capture the power of subunits that do not directly involve resource exchanges. Drawing on resource dependence theory, we advance a subunit power approach to argue that the dependence of the firm on its subunits for sales can help predict headquarters’ decision on subunit exits in the form of divestiture, dissolution, or spin-off. Using subunit data of a population of U.S. insurance groups in a longitudinal setting, we find that market periphery and overlap increase the hazard of subunit exit. However, a subunit’s relative sales growth reduces the positive effect of overlap on its hazard of exit, whereas external linkage lessens the positive effect of periphery on its hazard of exit.