Organizational Structure, Voluntary Disclosure, and Investment Efficiency

An important role of corporate disclosure is to improve the efficiency of capital allocation, and a key part of this process is firms' internal allocation of capital across their multiple projects. This paper examines the effect of internal capital allocation on firms' disclosure incentives and how these incentives affect internal capital allocation and investment efficiency. I identify conditions under which the multi-project firm that can perform internal capital allocation withholds more information than a group of stand-alone firms. Under these conditions, I show that the investment efficiency of the multi-project firm is higher than that of a group of stand-alone firms. The results suggest that corporate disclosure and internal capital allocation are substitutes in improving investment efficiency. This provides one explanation for why a multi-divisional structure may be preferred, although the structure appears inefficient