Organization design

This paper attempts to explain organization structure based on optimal coordination of interactions among activities. The main idea is that each manager is capable of detecting and coordinating interactions only within his limited area of expertise. Only the CEO can coordinate company-wide interactions. The optimal design of the organization trades off the costs and benefits of various configurations of managers. Our results consist of classifying the characteristics of activities and managerial costs that lead to the matrix organization, the functional hierarchy, the divisional hierarchy, or a flat hierarchy. We also investigate the effect of changing the fixed and variable costs of managers on the nature of the optimal organization, including the extent of centralization

Capital Structure and the Informational Role of Debt.

This paper provides a theory of capital structure based on the effect of debt on investors' information about the firm and on their ability to oversee management. The authors postulate that managers are reluctant to relinquish control and unwilling to provide information that could result in such an outcome. Debt is a disciplining device because default allows creditors the option to force the firm into liquidation and generates information useful to investors. The authors characterize the time path of the debt level and obtain comparative statics results on the debt level, bond yield, probability of default, probability of reorganization, etc. Copyright 1990 by American Finance Association.