Organizational structure as a determinant of performance: Evidence from mutual funds

Paper highlights

Organizational structure coordinates decisions and changes which proposals survive. This study shows that structures requiring broader agreement approve fewer initiatives, miss more good opportunities, and accept fewer bad ones. Structures that allow members to act independently show the opposite pattern.

The point is not that one structure is universally best. Structure creates a predictable trade-off between omission errors—rejecting a good proposal—and commission errors—accepting a bad one. The right design depends on which error costs more in the setting at hand.

Study design

The study examines more than 150,000 stock-picking decisions made by 609 mutual funds. Morningstar descriptions identify whether each fund is run by an individual, a team requiring consensus, or managers able to act more independently. Because both chosen and rejected stocks can be evaluated after the fact, the setting makes normally invisible omission and commission errors observable.

Results at a glance

• Decentralized funds accepted more investment opportunities, made fewer omission errors, and made more commission errors than centralized funds.
• Increasing the consensus required for approval moved funds in the opposite direction: fewer investments, fewer bad selections, and more missed winners.
• In this setting the two error types largely offset, so the structures did not differ in total error. That feature should not be assumed in settings where one type of mistake is costlier.

Why it matters

• Requiring several approvals reduces bad selections but increases missed opportunities; independent authority reverses that error profile.
• Organizational structure therefore changes the threshold for action rather than making decision-makers uniformly better or worse.
• The design question should begin with the relative costs of omission and commission errors, not a general preference for consensus or autonomy.

How to use this paper

Cite this for

• Large-sample empirical evidence that organizational structure changes omission and commission errors.
• A setting where both accepted and rejected opportunities can be scored after the fact.
• Consensus requirements as a decision threshold that changes which initiatives organizations pursue.

Useful for teaching

• How Type I and Type II errors appear in organizational design.
• Why consensus and autonomy are not generally good or bad; they produce different error profiles.
• A concrete empirical bridge between decision structure, exploration, and exploitation.

Careful claim

In the mutual-fund setting, structures requiring more agreement selected fewer stocks, missed more later winners, and accepted fewer later losers; total error did not differ because the two error types largely offset in this sample.

Abstract

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 is over 150,000 stock-picking decisions made by 609 mutual funds. Mutual funds offer an ideal and rare setting to test the theory, since there are detailed records on the projects they face, the decisions they make, and the outcomes of these decisions. The study’s independent variable, organizational structure, is coded based on fund management descriptions made by Morningstar, and estimates of the omission and commission errors are computed by a novel technique that uses bootstrapping to create measures that are comparable across funds.

The findings suggest that organizational structure has relevant and predictable effects on a wide range of organizations. In particular, the paper shows empirically that increasing the consensus threshold required by a committee in charge of selecting projects leads to more omission errors, fewer commission errors, and fewer approved projects. Applications include designing organizations that achieve a given mix of exploration and exploitation as well as predicting the consequences of centralization and decentralization. This work constitutes the first large-sample empirical test of the model by Sah and Stiglitz (1986).

Other links

• SSRN preprint

Last updated 2026-06-21