Resources, real options, and corporate strategy

Abstract

The types of investments a firm undertakes will depend in part on what it expects the outcome of those investments to reveal about its skills, capabilities, and assets (i.e., its resources). We predict that a firm will specialize when young, then experiment in a new line of business for some time, and then either expand into a large, multisegment business or focus and scale up its specialized business. We derive several empirical implications for firm valuations and the reaction of stock prices to news about firm prospects. We also offer a novel explanation for the well-documented ''diversification'' discount. r 2002 Published by Elsevier Science B.V.

Growth opportunities and the effect of corporate diversification on value

“…This result is consistent with prior research such as Bernardo and Chowdhry (2002) and Ferris et al (2002), who find that growth opportunities account for part of the diversification discounts/premiums. However, we report evidence of a mediating role of GOR on the U-shaped relation between diversification and firm value, suggesting that the effect of diversification on GOR explains in part how diversification may create or destroy value.…”

“…Cer-tain papers such as Bernardo and Chowdhry (2002) explain the diversification discount on the grounds that single-segment firms have more growth opportunities whereas multisegment firms may have exhausted part of these. Further supporting evidence, such as Ferris et al (2002), reveals for a sample of international joint ventures, that diversification is value-destroying in firms with a weak cash flow position and low growth opportunities available.…”

Entrepreneurial Spawning and Firm Characteristics

“…What ties these together is organizational fit: fit i) determines individual product profitability, therefore determining the incentive to invest in the development of new products, i.e., innovativeness, ii) determines 4 See for example Amador and Landier (2002); Anton and Yao (1995) There is a large literature on firm size and firm growth that is surveyed in Sutton (1997) and Coad (2009). 6 See for example Bernardo and Chowdhry (2002); Gomes and Livdan (2004); Maksimovic and Phillips (2002); Matsusaka (2001);and Matsusaka and Nanda (2002).…”

“…Regarding ii), Fluck andLynch (1999), Gertner, Scharfstein, andStein (1994), Matsusaka and Nanda (2002), and Rajan, Servaes, and Zingales (2000) study internal capital markets in conglomerates; Stein (1997) studies winner-picking skills; Gomes and Livdan (2004) and Maksimovic and Phillips (2002) study decreasing returns to scale. 8 We follow Bernardo and Chowdhry (2002) and Matsusaka (2001) in introducing a distinction between general and specific resources; such distinction does not, however, play as central a role in prompting diversification in our work as in theirs: diversification would occur in our model even absent general resources.…”

Real Options: Taking Stock and Looking Ahead

“…More recent works from a real options lens have also reached out to consider issues such as agency and economic incentive problems (Arya, Glover, and Routledge 2002), transaction costs (Chi and McGuire 1996), resources, capabilities and learning (Bernardo and Chowdhry 2002;Childs and Triantis 1999;Vassolo, Anand, and Folta 2004), and game-theoretic aspects of investment (Grenadier 2000;Smit and Ankum 1993;Smit and Trigeorgis 2004;Trigeorgis 1991). These extensions of real options build on critical differences between financial options and real options.…”