Incorporating opportunity costs in strategic management research: The value of diversification and payout as opportunities forgone when reinvesting in the firm

Abstract

This article explores the theoretical and empirical implications of incorporating forgone opportunities in strategic management research. Drawing on the well-studied literature examining whether firms should reinvest in focused businesses or pursue alternatives of diversifying and/or paying out excess cash to shareholders, hypotheses are developed for when diversification and payout policy, as the opportunity costs of reinvesting in the firm's original businesses, will present firms with higher and lower opportunity costs. Empirical results suggest that the value of reinvestment in existing businesses is higher for firms facing lower opportunity costs of forgoing other alternatives (e.g. diversification and paying out) than for firms that have much higher opportunity costs of forgoing these same alternatives. Implications for incorporating opportunity costs into the diversification literature and the broader strategic management literature are also explored.Much strategy research focuses on the impact of a firm's strategic choices on its performance. The typical empirical structure of this work is straightforward: Scholars apply some measure of the extent to which a firm is implementing a particular strategy, some measure of firm performance, and then-controlling for environmental and organizational contingencies identified by relevant theory-examine the empirical relationship between a strategy and performance.

Does the Diversification–Firm Performance Relationship Change Over Time? A Meta‐Analytical Review

“…If the count of years was an even number, we used the mean of the two middle years. For five studies which did not report the time period of their observations (Hoskisson et al, 2004;Mackey and Barney, 2013;Narasimhan and Kim, 2002;Oyewobi et al, 2013;Tanriverdi and Venkatraman, 2005), we used the year three years prior to the publication date. In order to study the development of the effect size over time, we created separate samples if the time span of observations covered more than one decade.…”

Desempenho de Empresas Diversificadas: Evidências da Indústria de Transporte Aéreo dos Estados Unidos

“…Em alguma medida, os achados desta pesquisa também corroboram as evidências de Markides e Williamson (1994), que chamam a atenção para o fato de a heterogeneidade no desempenho das firmas com estratégia de diversificação relacionada ser decorrente de sua capacidade de utilizarem seus ativos estratégicos. Em particular, os recursos analisados nesta pesquisa são tipicamente tangíveis e, portanto, não são recursos livres de escala (i.e., non-scale free resources) para uso na corporação, de tal modo que seu valor varia em função da melhor alternativa renunciada e na qual eles poderiam ser empregados (Levinthal & Wu, 2010), ou seja, as decisões de diversificação notadamente envolvem custos de oportunidade (Mackey & Barney, 2013). A estratégia empírica deste trabalho, porém, não permite avaliar a realocação dos recursos, ou seja, avaliar se as firmas apresentaram economias de escopo intertemporais (Helfat & Eisenhardt, 2004).…”

“…Mesmo que os custos de se afastar do negócio principal existam, a presente pesquisa não considera que ele possa ser mitigado pelas competências da corporação. Por último, a abordagem aqui adotada não leva em conta o valor de outras alternativas de investimentos, de tal forma que o efeito no desempenho aqui identificado possa estar subestimado (Mackey & Barney, 2013). Além disso, como o trabalho não usou amplamente métricas comuns ao setor ou mesmo métricas financeiras alternativas, as inferências apresentadas são limitadas.…”

Monitoring, Corporate Performance and Institutional Directors

“…Previous research analysing the relationship between corporate governance and firm performance was based on accounting measures (return on equity, return on assets and return on sales) and market measures (Tobin's Q ratio), with Tobin's Q ratio being the most frequently used. Financial accounting measures have often been criticised because: they are subject to manipulation; assets might be undervalued; or alterations might be created (Mackey and Barney, ; Sánchez Ballesta and García Meca ).…”

“…(2) assets might be undervalued; or (3) alterations might be created (Mackey and Barney, 2013;Sánchez Ballesta and García Meca 2007).…”