Identifying internal markets for resource redeployment

Research summary: This article examines the effect of dedicated institutional investors on firms' strategy uniqueness. We build on the uniqueness paradox where unique strategies are important drivers of economic rent, yet create an information problem whereby CEOs face discounts from the capital market, thus discouraging them from selecting unique strategies. We propose dedicated institutional investors as a partial remedy to the uniqueness paradox. Dedicated institutional investors invest in gaining private information about their investments, devote effort to understanding firms' strategies, and reduce capital market pressure. Thus, dedicated institutional investors can encourage CEOs to pursue more unique strategies. Our empirical results show the positive influence of dedicated institutional investors on strategic uniqueness, which is even stronger when firms operate in industries that are hard to value. Managerial summary: Unique strategies can be an important way for managers to create long-term value.However, some managers shy away from implementing such strategies, fearing that the short-term oriented capital market does not fully understand the long-term benefits of unique strategies and hence punishes them.Our study shows that investors who are long-term-

Section: Discussionmentioning

confidence: 99%

Standing out from the crowd: Dedicated institutional investors and strategy uniqueness

Oehmichen

Firk

Wolff

et al. 2021

“…Our choice of regulatory quality as an indicator of transaction costs is only one potential proxy for transaction costs, and more should be explored. Inducements might be captured with alternative measures of performance, including forward looking measures that approximate potential market value (Dickler & Folta, 2020).…”

Section: Discussionmentioning

confidence: 99%

Market exit and the potential for resource redeployment: Evidence from the global retail sector

Sohl

Folta

2021

Self Cite

Research Summary This study develops a framework providing guidance in examining when exit decisions might be driven by resource redeployment versus divestment. Exploratory analyses of the global retail sector show patterns largely consistent with conventional explanations of exit through divestment. We also provide the first large‐scale empirical evidence consistent with redeployment motives of exit. In particular, by focusing on the potential for redeployment of fixed assets (i.e., physical stores) across portfolio businesses, results show that market exit is more likely when there are combinations of lower resource adjustment costs, higher external transaction costs, and positive inducements. Under the same conditions, we also document a strong correlation between the number of fixed assets of an exiting business and the growth in fixed assets of its surviving siblings. Managerial Summary It is increasingly recognized that multibusiness firms have flexibility advantages over single‐business rivals, because they have the option to redeploy resources across businesses. This flexibility is purported to inspire quicker exit from markets, even if empirical evidence is lacking. We test this conjecture on 3,082 retail chains across 106 countries and find evidence consistent with this view—each additional related sibling in a country raises the hazard of country exit by 11% relative to retail chains without siblings. Since it is difficult to distinguish whether exit occurs through resource redeployment or divestment, we identify a set of unique determinants for each exit mode. Our theoretical framework and empirical findings help managers reconcile when to exit using internal resource markets versus external markets.

“…Some other work shows that multi‐business firms are better able (than single‐business firms) to exploit opportunities across the portfolio, whether it be by redeploying labor (e.g., Belenzon & Tsolmon, 2016; Santamaria, 2021; Tate & Yang, 2015), plants (e.g., Sohl & Folta, 2021), or retail shelf‐space (e.g., Giarratana & Santaló, 2020). Such adaptations seemingly help in retrenching or expanding revenues (e.g., Dickler & Folta, 2020; Miller & Yang, 2016) or exiting markets (O'Brien & Folta, 2009; Santamaria, 2021; Sohl & Folta, 2021). Finally, some empirical work drives at mechanisms leading to efficient redeployment: lower adjustment costs, greater inducements, and higher external transaction costs (e.g., Belenzon & Tsolmon, 2016; Dickler & Folta, 2020; Giarratana et al, 2021; Giarratana & Santaló, 2020; Sohl & Folta, 2021).…”

Section: Literature Reviewmentioning

confidence: 99%

“…This paper looks for evidence of whether and when corporate advantage obtains through redeployment flexibility, an emergent perspective emphasizing how multi‐business firms have more flexibility than single‐business firms to cope with uncertainty (Ansoff, 1957; Bower, 1970). This additional flexibility—recently emphasized by Helfat and Eisenhardt (2004), Levinthal and Wu (2010), Sakhartov and Folta (2014, 2015), Giarratana and Santaló (2020), and Dickler and Folta (2020)—comes from the potential to internally reallocate resources across portfolio businesses (Folta, Helfat, & Karim, 2016). Internal markets might enable quicker and/or more efficient retrenchment from declining businesses, or exercise of growth potential in others.…”

Section: Introductionmentioning

confidence: 99%

The value of flexibility in multi‐business firms

Dickler

Folta

Santaló

et al. 2022

Self Cite

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.