The Role of Organizational Structure in Senior Managers' Selective Information Processing

Abstract

CEOs' perceptions of the environment and the information processing shortcuts (or heuristics) they use to develop these perceptions are important to organizations. We study whether organizational structure, an important channel and filter for the flow of information in organizations, affects CEOs' perception gaps pertaining to the competitive environment. Perception gaps are defined as systematic deviations of subjective perceptions of the competitive environment from conceptions based on objective data. Studying 281 CEOs based in 216 firms, we find that functional structures are associated with wider environmental perception gaps, whereas divisional structures are associated with narrower gaps. To address endogeneity concerns, we control for firms' exposure to varied environments and only sample newly appointed CEOs, who, by definition, inherit predefined organizational structures exogenous to their own choices. Our study advances understanding of senior managers' information processing shortcuts by clarifying how organizational-level influences (i.e., organizational structure) affect CEOs' (mis)perceptions of the competitive environment.