We consider organizations that optimally choose the level of adaptation to a changing environment when coordination among specialized tasks is a concern. Adaptive organizations provide employees with flexibility to tailor their tasks to local information. Coordination is maintained by limiting specialization and improving communication. Alternatively, by letting employees stick to some preagreed action plan, organizations can ensure coordination without communication, regardless of the extent of specialization. Among other things, our theory shows how extensive specialization results in organizations that ignore local knowledge, and it explains why improvements in communication technology may reduce specialization by pushing organizations to become more adaptive.

We propose a general equilibrium model with multiple securities in which investors' risk preferences and expectations of dividend growth are time-varying. While time-varying risk preferences induce the standard positive relation between the dividend yield and expected returns, time-varying expected dividend growth induces a negative relation between them. These offsetting effects reduce the ability of the dividend yield to forecast returns and eliminate its ability to forecast dividend growth, as observed in the data. The model links the predictability of returns to that of dividend growth, suggesting specific changes to standard linear predictive regressions for both. The model's predictions are confirmed empirically.