In most multi-divisional firms, divisional managers run their divisionsas profit centers. They have broad decision-making rights and are evaluatedbased on divisional profits.

However, these divisional managers' decision rights do nottypically extend to their capital budget. They're notallowed to choose the amount of capitalto be invested in their division, as that decision is centralized. Thesedivisional managers have valuable information (specific knowledge)about the appropriate capital expenditures for their division.

(a) Why aren't they allowed to choose their capital budget?

In "Divisional Managers and InternalCapital Markets", Professors Ran Duchin and Denis Sosyura of theUniversity of Michigan show that divisional managers with socialties to the CEO receive more capital.

With that in mind, (b) Would you expect multi-divisional firms where divisional managers have social ties to theCEO to have a smaller or larger diversification discount thanmulti-divisional firms where the divisional managers do not havesocial ties to the CEO?

Any explanations for questions (a) and (b) would be greatly appreciated. I leave thumbs-up and good reviews :)