The existing literature on the relationship between
strategy and structure tends to ignore the legal
dimension of the organization of diversified firms. Yet,
there is considerable variation in the legal
organization of diversified firms; while some of these
firms are organized as simple corporations, many are
organized as “corporate groups” in which certain lines
of business are organized as separate, subsidiary firms.
In this paper we argue that this variation in legal
organization is observed because legal organization can
significantly affect firm value. In particular, forming
subsidiary firms to accommodate new businesses can
protect the outstanding stakeholders of a diversified
firm from increases in bankruptcy risk and liability
exposure. However, forming subsidiary firms also reduces
economies of scope. Hence, there are offsetting costs
and benefits to adopting different types of legal
organization. Changes in these relative costs and
benefits over time can also be expected to trigger
changes in legal organization, as well as the
divestiture of businesses characterized by particular
types of economic hazards. pdf