Organizational Structure as a Determinant of Performance: Evidence From Mutual Funds

This paper develops and tests a model of how organizational structure influences organizational performance. Organizational structure, conceptualized as the decision-making structure among a group of individuals, is shown to affect the number of initiatives pursued by organizations, and the omission and commission errors (Type I and II errors, respectively) made by organizations. The empirical setting are over 150,000 stock-picking decisions made by 609 mutual funds. Mutual funds offer an ideal and rare setting to test the theory, as detailed records exist on the projects they face, the decisions they make, and the outcomes of these decisions. The independent variable of the study, organizational structure, is coded from fund management descriptions made by Morningstar, and the estimates of the omission and commission errors are computed by a novel technique that uses bootstrapping to create measures which are comparable across funds. The findings suggest that organizational structure has relevant and predictable effects on a wide range of organizations. Applications include designing organizations that compensate for individual’s biases, and that achieve a given mix of exploration and exploitation.