Growth Options, Beta, and the Cost of Capital

We show how to decompose a firm's beta into its beta of assets-in-place and its beta of growth opportunities. Our empirical results demonstrate that the beta of growth opportunities is greater than the beta of assets-in-place for virtually all industries over all periods of time dating back to 1977. The difference has important implications for determining the cost of capital. For example, when choosing comparables to determine a project beta one should match the growth opportunities of the project with those of the comparable firm. Assuming a 6% market equity risk premium, accounting for growth opportunities alters the project cost of capital by as much as 2% to 3%.     

Index of Authors Volume 7, 2003

Authors Index

Index of Authors Volume 7, 2003     

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

We study the relationship between diversification and firm performance in the context of the decline in levels of diversification over time. We argue that the pressure to reduce diversification may have more strongly affected those firms whose diversification strategies were most detrimental to firm performance. We employ meta‐analytical regression (MARA) in order to test our hypotheses, using a total of 267 primary studies containing 387 effect sizes based on 150,000 firm‐level observations from over 60 years of research on the diversification–firm performance relationship. The findings suggest that levels of unrelated diversification have decreased, whereas levels of related diversification have increased since the mid‐1990s, following an initial decrease in the 1970s and 1980s. Furthermore, we find that the relationship between unrelated diversification and firm performance has improved significantly over time, whereas the relationship between related diversification and performance has remained relatively stable.     

Distress Anomaly and Shareholder Risk: International Evidence

Financially distressed stocks in the United States earn puzzlingly low returns giving rise to the distress risk anomaly. We provide evidence that the anomaly exists in developed countries, but not in emerging ones. Using cross‐country analyses, we explore several potential drivers of returns to distressed stocks. The distress anomaly is stronger in countries with stronger takeover legislation, lower barriers to arbitrage, and higher information transparency. In contrast, shareholder bargaining power and expected stock return skewness in a country do not affect the anomaly. These findings suggest that various aspects of shareholders’ risk play an important role in shaping distressed stocks returns.     

A Simple Derivation of Moments of the Exponentiated Weibull Distribution

The Exponentiated Weibull family is an extension of the Weibull family obtained by adding an additional shape parameter. The beauty and importance of this distribution lies in its ability to model monotone as well as non-monotone failure rates which are quite common in reliability and biological studies. As with any other distribution, many of its interesting characteristics and features can be studied through moments. Presently, moments of this distribution are available only under certain restrictions. In this paper, a general derivation of moments without any restriction whatsoever is proposed. A compact expression for moments is presented.     

CHALLENGES TO THEORY DEVELOPMENT IN ENTREPRENEURSHIP RESEARCH*

Why do some new ventures succeed while others fail? What is the essence of entrepreneurship? Who is most likely to become a successful entrepreneur and why? How do entrepreneurs make decisions? What market, regulatory, and organizational environments foster the most successful entrepreneurial activities? Entrepreneurship research is plagued by these and other fundamental unanswered questions, for which there does not exist a cohesive explanatory, predictive, or normative theory. In this article we identify major challenges for entrepreneurship theory development, and offer insights into promising directions for future research. Our conclusion suggests that it may be too ambitious to expect a complete and robust theory due to the interdisciplinary nature of entrepreneurship. However, we show that by integrating perspectives and by applying analytic, empirical and experimental tools from a range of fields, some of the fundamental questions can be answered.     

Corporate divestitures and family control

This paper investigates the relationship between divestitures and firm value in family firms. Using hand‐collected data on a sample of over 30,000 firm‐year observations, we find that family firms are less likely than non‐family firms to undertake divestitures, especially when these companies are managed by family rather than non‐family‐CEOs. However, we then establish that the divestitures undertaken by family firms, predominantly those run by family‐CEOs, are associated with higher post‐divestiture performance than their non‐family counterparts. These findings indicate that family firms may fail to fully exploit available economic opportunities, potentially because they pursue multiple objectives beyond the maximization of shareholder value. These results also elucidate how the characteristics of corporate owners and managers can influence the value that firms derive from their corporate strategies. Copyright © 2014 John Wiley & Sons, Ltd.     

Procurement bidding with restrictions

In many procurement situations with simultaneously offered projects, firms face participation restrictions and can bid only on a subset of the projects. This phenomenon is prevalent in a variety of observed situations such as bidding for private label supplies, business to business procurement or government projects. We show that for the case of n bidding firms where each is restricted to bid on a subset of the offered projects, there exists a symmetric equilibrium in which each bidder has a positive expected equilibrium profit. Prices are bounded away from marginal costs even if all the bidders are homogenous. This results from the fact that there is a positive probability that each firm will find itself in the position of being the sole bidder on a project. While the equilibrium probability of bidding on a project increases with its value, it is interesting to note that the bidding probability on the projects approaches an equiprobable one as the number of bidding firms increases. We find that the equilibrium profits decrease as firms are able to bid on more of the available projects. In contrast, bidder commitment to bid on specific projects increases the equilibrium profits of all firms. We also examine the effect of heterogeneity on equilibrium profits. Greater heterogeneity in the project valuations leads to lower firm profits. On the other hand, heterogeneity among bidders in terms of the number of projects that they are constrained to bid on leads to greater profits for the firms that can bid on more projects (regardless of the mix of the firms in the industry.) Finally, we analyze the effect of uncertainty in project valuations and show greater uncertainty in project valuations (as represented by a mean preserving spread) decreases the equilibrium profits. We conclude with an empirical analysis of bidding behavior that tests the predictions of the theory. We find that the probability of bidding on a particular project is increasing in its value, decreasing in the other projects values and decreasing in the number of bidding subjects. Furthermore, the value of the bids on a project increase with its valuation and decrease with the total number of bidders.

Impact of perceived value on the online purchase intention of base of the pyramid consumers

Despite the voluminous purchasing power of the consumers at the base of the pyramid (BOP), substantial research has not been carried out on their online buying behaviour. This study investigates the factors that trigger the online shopping intention of BOP consumers. We conducted semi-structured in-depth interviews with 52 BOP respondents from India. Our thematic analysis indicates four perceived benefits and five sacrifices influencing BOP consumers' perceived value for online purchases, subsequently determining their adoption behaviour. As a novel contribution to the literature, this study unfolds several unknown factors that motivate/demotivate BOP consumers to buy online using the Value-based Adoption Model (VAM). The findings of this study will help e-commerce marketers enhance BOP consumers' usage intention toward online purchases.     

Putting market-facing technology to work: Organizational drivers of CRM performance

A large proportion of firms that adopt customer relationship management (CRM) technology find it challenging to integrate CRM technology into their core marketing processes and utilize CRM strategically to appreciably improve their performance. The authors conceptualize a model to understand the drivers of superior CRM performance after CRM technology has been adopted by a firm and examine strategic utilization of CRM technology as driven by user acceptance and proficiency in the form of employee buy-in and expertise. Top management championship practices, employee information technology (IT) skills, and CRM knowledge are identified and examined as key building blocks toward strategic utilization. The empirical test of the conceptual model is based on a mail survey of North American firms that have adopted information technology-based CRM systems. The results, based on random effects model, show that strategic utilization of CRM technology leads to higher performance when there is an emphasis on using it to manage business-to-business rather than business-to-consumer relationships, user expertise (but not buy-in) impacts CRM performance through strategic utilization, and top management championship practices, CRM knowledge, and employee IT skills impact strategic utilization through buy-in and expertise.