Capital structure, product market dynamics, and the boundaries of the firm
We model a new product market opportunity as an option and ask whether it is best exploited by a large incumbent firm (integration) or by a small separate firm (nonintegration). Starting from a standard framework, in which value-maximizing investment and financing decisions are jointly determined, we show that integration protects assets in place value, whereas nonintegration protects option value and maximizes financial flexibility. We show that increases in standard measures of cash flow risk predict exploitation of new opportunities by specialized firms, whereas increases in product market competition (e.g., the risk of competitive preemption) predict exploitation by incumbents. We also show that alliances organized as licensing agreements or revenue-sharing contracts sometimes better balance the sources of value and thus may dominate more traditional forms of organization. These organizational equilibria arise from the dynamic interaction of the new opportunity's option-like features with realistic competitive forces.
Duke Scholars
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Related Subject Headings
- Operations Research
- 46 Information and computing sciences
- 38 Economics
- 35 Commerce, management, tourism and services
- 15 Commerce, Management, Tourism and Services
- 08 Information and Computing Sciences
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Published In
DOI
EISSN
ISSN
Publication Date
Volume
Issue
Start / End Page
Related Subject Headings
- Operations Research
- 46 Information and computing sciences
- 38 Economics
- 35 Commerce, management, tourism and services
- 15 Commerce, Management, Tourism and Services
- 08 Information and Computing Sciences