Spread Too Thin: Uncertainty Shocks and Diseconomies of Scope

Abstract: Although many streams of literature have recognized that firms with broader scope often underperform those with greater focus, relatively little research has examined the mechanisms that might account for these diseconomies of scope. One potential mechanism is that uncertainty shocks ---events or short-term periods that upset the normal course of business--- place unusual demands on the limited attention of managers. When managers of larger, more diverse firms allocate their time and organizational resources to address these events, they necessarily divert attention and resources away from other businesses, thereby converting these uncertainty shocks in one part of the organization to performance shocks in other parts of it. An empirical examination of the relationship between the distribution of films in theaters and videos for sale demonstrates that uncertainty shocks in theatrical distribution become performance shocks in the video market and that the magnitude of these effects increases for larger, more diversified firms.