Research summary: This article explores one important way in which multi-business firms have advantages over single-business firms. By having flexibility to reallocate resources, such as human capital, production capacity, or equipment, between businesses in their portfolio, they may be able to efficiently expand in markets with strong opportunities and contract in less attractive markets. We provide empirical evidence confirming that compared to single-business firms in the same industry and of the same size, businesses in multi-business firms expand revenues 12% more aggressively, and retrench revenues 37% more aggressively, on average. This first generalizable test of the theory also reveals that the relative advantage of multibusiness firms escalates with lower internal resource adjustment costs, higher external transaction costs, and greater opportunity differences with the portfolio. Managerial summary: In this article, we show an important way in which multi-business firms have advantages over single-business firms. By having flexibility to reallocate resources, such as employees, production capacity, or equipment, between businesses in their portfolio, they may be able to efficiently expand in markets with strong opportunities and contract in less attractive markets. We provide empirical evidence confirming that compared to similar single-business firms in the same industry and of the same size, businesses in multi-business firms expand revenues 12% more aggressively, and retrench revenues 37% more
Research Summary
Whether diversified firms have advantages over their single‐business counterparts is the focus of much research in strategic management. Indeed, there is sparse evidence that corporate advantage exists, on average. We explore one potential driver of corporate advantage—that multi‐business firms have more flexibility than single‐business firms to cope with uncertainty, because they can internally redeploy resources across businesses. Using Compustat data, we show that uncertainty increases the relative advantage of multi‐business firms, a finding robust to controls for endogeneity. Consequently, the paper provides important insight and evidence around when corporate advantage might obtain. Moreover, we find that growth option value is accentuated in the presence of switching flexibility. Finally, multi‐business firms with redeployment experience and businesses with more inversely correlated returns benefit more from uncertainty.
Managerial Summary
Multi‐business firms have a flexibility advantage over single‐business firms as they can reallocate firm resources from one business unit to another depending on inducements. What is the impact of this flexibility on firm value? In this paper, we test whether such a flexibility advantage translates into greater economic returns in more volatile markets. We expect that resource redeployment creates value if it amplifies business‐specific positive shocks while alleviating business‐specific downturns. Consistent with this argument, we find empirical evidence that with increasing stock market volatility, multi‐business firms benefit significantly more in terms of firm value than their single‐business counterparts. In particular, in highly volatile stock markets, monthly adjusted returns are 2.3 times higher for multi‐business firms than for single‐business firms.
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