The value of flexibility in multi‐business firms

Abstract

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.

Supply‐side inducements and resource redeployment in multiunit firms

“…Changes in relative resource supply, which can arise from various factors that differentially affect resource stock accumulation across firm units, can also prompt redeployment. This insight broadens our understanding of the scope of the theory and implies that redeployment can create value not only in diversified firms, which have been the focus of empirical studies of redeployment (e.g., Belenzon & Tsolmon, 2016; Chang & Matsumoto, 2022; Dickler et al, 2022; Dickler & Folta, 2020; Giarratana et al, 2021; Lieberman et al, 2017; Sabel & Sasson, 2023; Sohl & Folta, 2021), but also in nondiversified, multiunit firms. We also extend theory by illuminating the distinct patterns of intra‐firm resource flows that result from different sources of inducements.…”

Endogeneity and causal attributions in management research: Some reflections and proposals

“…Matching techniques (Dickler et al, 2022; Eberhart et al, 2017), both synthetic and natural, aid in creating a control group where all other system variables remain statistically indistinguishable, while the primary covariate x is allowed to vary. This adjustment in the characteristics of the baseline dataset effectively reduces endogeneity.…”

Renewing the resource‐based view: New contexts, new concepts, and new methods

“…As an alternative to complete exit, a firm may partially exit one business and redeploy the available resources to another business (Helfat & Eisenhardt, 2004). Thus, the redeployability of resources provides firms with the flexibility to expand their more attractive businesses while shrinking less attractive businesses (Chang & Matsumoto, 2022; Dickler & Folta, 2020; Dickler, Folta, Santaló, & Giarratana, 2022). The flexibility provided by the redeployability of resources can also help firms adapt to external or internal constraints.…”