Resource relatedness,redeployability, and firm value

Our paper elaborates the effects of resource relatedness on value of a multibusiness firm. We emphasize that value results from interplay of benefits of synergy and redeployability. This view, considering how synergy and redeployability interact in determining value, extends prior separate considerations of the two benefits. We also diagnose that the value effect of resource relatedness is contingent on uncertainty and specify this contingent relationship. We use the real option valuation approach and formally evaluate the impacts of the two effects of relatedness. This explication enables us to demonstrate how redeployability contributes to value beyond synergy, and how they contribute in tandem. In this sense, we illuminate previously undiagnosed value in multibusiness firms. Beyond theoretical implications, our results have important empirical and managerial implications. Copyright © 2013 John Wiley & Sons, Ltd.     

The relationship between portfolio diversification and firm value: The evidence from corporate venture capital activity

Corporate venture capital (CVC) activity exposes firms to new technologies and markets. An important but as yet unexplored question is the relationship of the industry diversification profile of the portfolio of venture companies to corporate value creation. Insights from options and diversification perspectives support our hypothesis that diversification of a corporate investor's portfolio of venture companies is related to corporate wealth creation in a U‐shaped relationship. We also propose that a corporate investor's financial constraints moderate the relationship between the diversification profile of its CVC portfolio and value creation. When we tested our hypotheses using a sample of CVC investments across multiple industries, we found support for them, and these findings may inform the CVC activities of corporate investors. Copyright © 2013 John Wiley & Sons, Ltd.     

Stock market undervaluation of resource redeployability

Research Summary : Stock market undervaluation of resources was often assumed to have strategic implications. Such undervaluation lets firms buy resources relatively cheaply, but it can also constrain resource deployment. This article shows that the option to redeploy a firm's resources to a new business can be undervalued in stock markets when investors face ambiguity about that option due to uniqueness of redeployment. The developed formal model derives conditions under which stock markets undervalue resources. Those conditions are summarized with an empirical operationalization that can be tested with a broad range of strategic implications. Besides, the model provides a more complete account of resource redeployability by demonstrating the redeployability paradox. The paradox highlights that some determinants of redeployability enhance undervaluation, while simultaneously increasing objective value of redeployable resources. Managerial Summary : Stock markets can systematically undervalue resources. On the one hand, such undervaluation creates a profitable opportunity for a firm that needs some resources for its growth and compares the option to buy stock in another firm, whose resource are undervalued, with the option to build those resources internally. On the other hand, such undervaluation poses limits to resource deployment strategies of the undervalued firm. When does such undervaluation occur? This study highlights one possible source for undervaluation, ambiguity that is faced by stock market investors about the option to redeploy a firm's resources to a new business. The study specifies conditions under which stock markets are more likely to undervalue resources. The understanding of those conditions can guide managers toward strategic opportunities.     

Demand‐side strategy,relational advantage,and partner‐driven corporate scope: The case for client‐led diversification

Research Summary: We advance research on corporate diversification by joining insights from the demand‐side and relational views in strategy to offer a novel theory of client‐led diversification. We propose that client‐led diversification results from a combination of the customer‐driven opportunities emphasized in the demand‐side view and the creation of added value through relational assets that is a central tenet of the relational view. Furthermore, we hypothesize that suppliers’ client‐specific knowledge, clients’ relational commitment to suppliers, and growth opportunities in clients’ markets (relative to the suppliers’ own markets) will magnify the client‐led diversification effect. We test our hypotheses using a longitudinal dataset on patent law firms and their diversification into new domains of patent prosecution work for their corporate clients. Managerial Summary: Explanations of why firms diversify into new lines of business have largely concerned the redeployment of underutilized resources, with little regard to opportunities or influences stemming from firms’ existing customers. In our article, we show how the changing scope of business needs from a knowledge‐based supplier firm's set of existing clients is a central driver of supplier‐firm diversification, and this is especially the case when the level of relational assets shared between a supplier and its clients is higher. In a competitive landscape where suppliers compete intensively for the business of clients, our results show how managers can increase the likelihood of capturing additional business from its existing exchange relationships rather than bearing the risks of seeking new exchange relationships.     

Economies of Scope,Resource Relatedness,and the Dynamics of Corporate Diversification

Research summary: The dominant view has been that businesses that are more related to each other are more often combined within diversified firms. This study uses a dynamic model to demonstrate that, with inter‐temporal economies of scope, diversified firms are more likely to combine moderately related businesses than the most‐related businesses. That effect occurs because strong relatedness reduces redeployment costs and makes firms redeploy all resources to better performing businesses. The strength of that effect depends on inducements for redeployment measured as the current return advantage of one business over another business, volatilities of business returns, and correlation of those returns. This study develops hypotheses for those relationships and suggests empirical operationalizations, encouraging empiricists to retest the implications of relatedness for the dynamics of corporate diversification. Managerial summary: It is believed that diversified firms are more likely to combine more‐related businesses because relatedness enables sharing of resources between businesses. Indeed, a firm can apply knowledge created in one business to another business, avoiding costly duplication in knowledge development. Resource sharing also adds value when a firm offers several products, adding the convenience of one‐stop shopping and charging higher prices. However, resource sharing is not the only motivation for corporate diversification. In environments where profitability of businesses changes frequently, firms diversify by redeploying part of resources from an underperforming business to a better performing business. This study uses a dynamic model to demonstrate that, with that second motivation for corporate diversification, firms end up combining moderately related businesses rather than the most‐related businesses. Copyright © 2017 John Wiley & Sons, Ltd.     

Global diversification strategy and corporate profit performance

Based on a sample of 62 multinationals, this paper examines the impact of global diversification strategy on corporate profit performance by integrating the product and the international market dimensions of diversification. The results suggest that the corporate profit performance impact of related and unrelated diversification varies contingent upon the extent of a firm's international market diversification. One important lesson of this work is that both business strategy researchers and managers should review corporate diversification as having distinct yet interactive strategic dimensions—product and international market—and they would do well to recognize both the different and the joint effect of these dimensions on corporate profit performance.     

Variance-enhancing corporate entrepreneurship under deregulation: An option portfolio approach

The current study draws upon the real option portfolio theory to examine the relationship between deregulation and corporate entrepreneurship. We propose that a firm could respond to deregulation with variance-enhancing corporate entrepreneurial activities (CEAs), which increase the portfolio value of real options to exploit the upside opportunities and constrain the downside loss. We develop two dimensions of CEAs—frequency and diversity—to capture the value of the option portfolio, and we propose that these two dimensions contribute to a company’s long-term equity return and innovation performance. We test these arguments with 526 Chinese listed firms in five innovative industries from 2001 to 2005, and we find significant support for our hypotheses. Our empirical findings and the option portfolio approach carry important implications for entrepreneurship theory and policy. The CEA portfolio could be a useful tool to configure and allocate strategic investments proactively.     

Why strategic factor markets matter: “New” multinationals' geographic diversification and firm profitability

This study examines firm profitability differences among “new” multinational enterprises (NMNEs) pursuing geographic diversification into two distinct types of geographic locations based on the development of strategic factor markets. Building on strategic factor markets theory, we propose that firm‐specific advantages of NMNEs contribute differentially to firm profitability because they evolve differently given strategic factor market differences in host compared to home countries. Using a sample of Korean manufacturing MNEs during the 1993–2003 period, we find that geographic diversification into resource‐poorer host countries has a positive relationship with firm profitability, whereas geographic diversification into resource‐richer host countries has a U‐shaped relationship with firm profitability. Our study demonstrates why strategic factor markets—an important and often overlooked contextual factor—matter in exploring rationales for geographic diversification. Copyright © 2014 John Wiley & Sons, Ltd.     

Opportunity costs,industry dynamics,and corporate diversification: Evidence from the cardiovascular medical device industry, 1976–2004

This paper examines how demand conditions across alternative markets impact diversification decisions and firm performance by influencing the opportunity costs of deploying non‐scale free capabilities. Using data within the cardiovascular medical device industry, this study shows that: (1) firms with a larger stock of pre‐entry innovation experience are more likely to diversify; (2) firms in a current market with greater relative demand maturity are more likely to diversify; (3) diversification is associated with a performance decrease in the current market; and (4) diversification is associated with a performance increase at the corporate level. These findings shed new light on the self‐selection process of corporate scope, the conceptualization of firm capabilities, and the connection between industry dynamics and resource deployment. Copyright © 2013 John Wiley & Sons, Ltd.     

How capital structure influences diversification performance: A transaction cost perspective

Extant theories agree that debt should inhibit diversification but predict opposing performance consequences. While agency theory predicts that debt should lead to higher performance for diversifying firms, transaction cost economics (TCE) predicts that more debt will lead to lower performance for firms expanding into new markets. Our empirical tests on a large sample of Japanese firms support TCE by showing that firms accrue higher returns from leveraging their resources and capabilities into new markets when managers are shielded from the rigors of the market governance of debt, particularly bond debt. Furthermore, we find that the detrimental effects of debt are exacerbated for R&D intensive firms and that debt is not necessarily harmful to firms that are either contracting or managing a stable portfolio of markets. Copyright © 2013 John Wiley & Sons, Ltd.     

Well Known or Well Liked? The Effects of Corporate Reputation on Firm Value at the Onset of a Corporate Crisis

Research summary : We study how two dimensions of reputation (i.e., generalized favorability and being known) and attribution of crisis responsibility affect firm value at the onset of a crisis. Analyzing 126 corporate crises befalling publicly listed firms in China from 2008 to 2014, we find that generalized favorability serves as a buffer, while being known can be a burden, in influencing firm value. We also find that the buffering effect of generalized favorability is stronger when the attribution of crisis responsibility is low (vs. high). In addition, there is a negative interaction effect between the two dimensions of reputation such that the buffering effect of generalized favorability weakens when firms are better known. We discuss our contributions to research on corporate reputation and crisis management. Managerial summary : Corporate reputation is an intangible asset, especially at the onset of a corporate crisis. This research sheds light on the “double‐edged sword” of corporate reputation by examining the effects of two reputation dimensions (i.e., being liked and being known) on firm value. Our results suggest that well‐liked firms can leverage their generalized favorability among stakeholders to assuage firm value loss, whereas well‐known firms may have to better communicate with stakeholders to overcome the burden of stakeholders' attention that escalates firm value loss. To better cope with the onset of a crisis, firms should therefore enhance their generalized favorability and simultaneously avert stakeholders' excessive attention. In addition, well‐liked firms can further buffer against the loss in firm value by reducing the perceived intentionality of a crisis. Copyright © 2017 John Wiley & Sons, Ltd.     

Diversification, Concentration and Economic Performance: Korean Business Groups

The purpose of this paper is to analyze empirically some of therelationships involving corporate diversification, concentration and economic performance for agroup of 25 of the largest Korean chaebols or business groups over the period 1985–1995. UsingHerfindahl–Hirschman indices of inter-industry diversification and intra-group member firm concentration,our results indicate that increased conglomerate diversification does not affect chaebol profitswhereas changes in internal member firm concentration do. Of particular interest with respect to bothdiversification and concentration are our findings that a quadratic relationship exists between groupprofits and the number of member firms, with both smaller and larger chaebols having higher profitsthan intermediate size chaebols. A similar relationship also exists with respect to group size measuredin terms of total assets. Since the number of member firms is included as an explanatory variable, ourresults imply that profitable chaebols expand primarily within their existing industries ratherthan by adding firms in new markets.     

Diversification entry: Internal development versus acquisition

The economic theory of barriers to entry is integrated with the corporate strategy concept of relatedness, to develop a model of the choice between internal development and acquisition in diversification entry into new markets. The model is tested on original data collected for this study from PIMS Program participants. These original data cover the parent company characteristics, entry strategy and entry outcome for 59 entrants into 31 markets. These entry-related data are merged with existing PIMS data on the structure of the entered markets and their incumbents. Results of binary regression analysis show that the choice between the two entry modes is well explained by measures of barriers and relatedness. Higher barriers are more likely to be associated with acquisition entry. Greater relatedness is more likely to be associated with direct entry.     

Caught in the crossfire: Dimensions of vulnerability and foreign multinationals' exit from war‐afflicted countries

Research summary : When war occurs in a country, some foreign multinational enterprises (MNEs) stay on, while others flee. We argue that MNE responses to external threats depend on the firm's vulnerability, which we decompose into exposure (proximity to threat), at‐risk resources (potential for loss), and resilience (capacity for coping). We test the independent and interactive effects of these dimensions using a geo‐referenced sample of 1,162 MNE subsidiaries in 20 war‐afflicted countries between 1987 and 2006. We find that highly valuable resources can become liabilities when exposed to harm, and the best way to cope with external threats may be to exit. Our findings extend the resource‐based view and real options theory by demonstrating the bounded value of resources and options in the face of environmental contingencies. Managerial summary : A recent survey of multinational enterprise (MNE) executives revealed that 30 percent of the respondents believed that their firms were exposed to collateral damage from war, with more than 90 percent expecting risks to rise. Yet, 25 percent of the executives indicated that their firms had no continuity plan. Our study of MNEs in war‐afflicted countries highlights the costs of not having a response strategy in place. We find that, in war zones, otherwise highly valuable locations and resources can become sources of vulnerability that prompt early withdrawal from a host country. Our work further highlights the value of real options thinking—where structural solutions such as building redundancy into a portfolio of options may exist in advance of problems—for navigating hostile environments. Copyright © 2016 John Wiley & Sons, Ltd.     

Determinants of alliance partner choice: Network distance,managerial incentives,and board monitoring

Research Summary: We ask if managerial opportunism is a significant problem in alliance partner choice and examine the role of corporate governance mechanisms in explaining this choice. Using a sample of 313 alliances of U.S. firms from the pharmaceutical and biotechnology industries from 1992 to 2010, we find that managerial incentives lead to managerial preference for relationally risky distant partners over existing and new close partners. Further, board monitoring encourages managers to pursue existing and distant partners over new close ones, choices aligned with shareholder interests. In addition, we find that board monitoring substitutes for managerial incentives in alliance partner choice. We contribute to the literature on alliance partner choice to identify an important, and hitherto, unexplored perspective. Managerial Summary: This article examines whether managers and shareholders view alliance‐related risks differently, and how the divergent interests between managers and shareholders affect alliance partner choice. We argue that managers’ concern about their loss of employment and compensation from alliance failure impedes the choice of relationally risky alliance partners that may increase shareholder value. We also argue that managerial stock ownership and board monitoring mitigate this managerial propensity. Our findings suggest that stock ownership owned by managers and strong board monitoring are effective governance mechanisms to align managers’ interests with those of shareholders. Our study offers a novel perspective to understand alliance partner choice by viewing the firm as an entity comprised of fragmented interests.     

Incubation of an industry: Heterogeneous knowledge bases and modes of value capture

Research summary : We examine firms' technological investments during an industry's incubation stage—the period between a technological breakthrough and the first instance of its commercialization. Using the agricultural biotechnology context, we develop stylized findings regarding the understudied knowledge evolution preceding product evolution in an industry's life cycle, the trend and diversity of firms undertaking technological investments in anticipation of industry emergence, their leverage of markets for technology and corporate control, and their use of alternative modes of value capture. We juxtapose these stylized findings with existing literature to identify new theoretical insights, and set the stage for future scholarly work to develop and test new theories for the incubation period, examine its existence in other industries, and study its impact on subsequent firm and industry evolution. M anagerial summary : New technological breakthroughs present managers of existing firms and aspiring entrepreneurs with opportunities to create altogether new industries. During the vibrant incubation period, we find that multiple firms capitalize on diverse knowledge bases to shape the industry's knowledge evolution and also capture economic value in diverse ways. Existing firms in the obsolescing industry are more likely to become targets in acquisitions given their complementary knowledge. Science‐based start‐ups are more likely to engage in acquisitions and collaborations with established firms. Diversifying firms are more likely to commercialize products after leveraging of internal development, acquisitions, and alliances. Our study highlights the importance for managers to think about “success” and “failure” across multiple yardsticks of performance, rather than only as product commercialization as the sole goal. Copyright © 2016 John Wiley & Sons, Ltd.     

多元化经营与多元化折价--企业多元化研究的新进展

对多元化经营的讨论是传统金融学的一个重要议题。一致的共识是多元化经营会损害企业价值，多元化企业存在着多元化折价；而且大量的实证研究也具体度量了多元化折价程度。而近期对多元化经营的研究却从不同的侧面对上述结论提出了置疑。本文在总结了国外对企业多元化最新研究的基础上，认为对多元化折价的置疑本身仍存在诸多问题，因此，不能仅凭相对少量的研究结论就轻易否认多元化折价的存在。     

External Venturing and Discontinuous Strategic Renewal: An Options Perspective

This study examines the relationship between a firm's venturing activities and its undertaking of strategic renewal. The study was motivated by some important gaps in the corporate entrepreneurship literature on venturing and renewal. The extant literature has not focused on the different types and dimensions of firms' renewal activities. In particular, discontinuous renewal involving shifts in firms' core businesses is not well understood. Moreover, the conditions that drive firms to undertake strategic renewal have not been examined. For example, it is not known how venturing increases or reduces the benefits of undertaking renewal. This study focuses on a discontinuous form of renewal involving major changes in firms' core businesses and examines firms' external venturing activities that complement their internal development. We examine corporate venture capital (CVC) investments, which are direct minority equity investments made by established companies in privately held ventures. Discontinuous renewal is conceptualized as resulting from a set of related, and often sequential, managerial decisions. The first managerial decision is to initiate growth in a business that is relatively newer or smaller for the organization. The second decision is to move away, or even withdraw completely, from the current core business that enabled prior growth and prosperity for the firm and served as its primary revenue earner. Employing a real options perspective, we argue that CVC investments create growth options in new and existing businesses but do not result in firms' withdrawal from existing businesses. Therefore, we expect CVC activity to be negatively associated with the likelihood of a firm undertaking discontinuous renewal. We also propose that the benefits of withdrawing from existing businesses are even lower, and the costs even higher, for firms in dynamic industries and for firms that possess strong internal capabilities. The predictions of the study are tested using longitudinal data on 477 firms from the 1990 Fortune 500 list for the period 1990–2000. We find support for all our predicted hypotheses. These results help address important limitations in the corporate entrepreneurship literature. The study also contributes to the real options and organizational capabilities literatures.     

Stepping across for social approval: Ties to independent foundations' boards after financial restatement

Research Summary: Integrating research on independent philanthropy and organizational misconduct, we argue that affiliations with independent foundations provide social approval benefits for firms that restate their financials. We use a panel of S&P 500 companies from 2004 to 2011 to investigate the addition of foundation board ties by restating firms. CEOs of restating firms add more new foundation board ties than CEOs of non‐restating firms, while existing corporate philanthropy and greater corporate reputation diminish this effect. We also find that new ties to foundations boards influences media tenor for restating firms more than it does for non‐restating peers. Our study offers a nuanced analysis of the post‐crisis actions of restating firms relative to non‐restating peers and highlights the relevance of ties to nonprofit boards for corporate governance. Managerial Summary: Firms oftentimes fire their top executives in the aftermath of misconduct, but such response is itself disruptive for the firm's operations. Instead, we suggest that forging ties to independent foundations can help firms in such contexts without unsettling effects. Our results show that, after a restatement event, CEOs of misconduct firms are especially likely to join new foundation boards as trustees and thus seem to be aware of the benefits of these associations. CEOs from firms with existing in‐house philanthropy or a high reputation do not join as many new foundations' boards of trustees. We also find that new firm‐foundation links are promptly and positively evaluated by the media, thus helping misconduct firms regain social approval.     

Focus, Transparency and Value: The REIT Evidence

We trace the effects of corporate focus by examining the relationships among focus, cash flows and firm value. In contrast to past studies that examine the effects of diversifying across SIC-code-defined industries, we show that diversification, even within a single industry, reduces value. Our evidence, drawn from a panel of real estate investment trusts, indicates that this reduction is not due to poor managerial performance. Project-level cash flows are actually higher for less focused firms. However, these gains are offset by higher management, administrative and interest expenses. Thus, the corporate cash flows available to shareholders are not related to focus. Finally, we provide empirical evidence that links the effect of focus on value to informational asymmetries which cause the equity of diversified firms to be less liquid. We attribute some of the effect of focus on the cost of both debt and equity to informational asymmetries or transparency costs.