Abstract

http://ssrn.com/abstract=1767483
 
 

References (35)



 
 

Citations (1)



 


 



Capital Structure, Product Market Dynamics, and the Boundaries of the Firm


Dirk Hackbarth


Boston University School of Management

Richmond D. Mathews


University of Maryland - Department of Finance

David T. Robinson


Fuqua School of Business, Duke University; National Bureau of Economic Research (NBER)

July 2, 2012

AFA 2012 Chicago Meetings Paper

Abstract:     
We study how interactions between financing and investment decisions can shape firm boundaries in dynamic product markets. In particular, we model a new product market opportunity as a growth option and ask whether it is best exploited by a large incumbent firm (Integration) or by a separate, specialized firm (Non-Integration). Starting from a standard theoretical framework, in which value-maximizing corporate investment and financing decisions are jointly determined, we show that Integration best protects assets in place value, while Non-Integration best protects the value of the growth option and maximizes financial flexibility. These forces drive different organizational equilibria depending on firm and product market characteristics. In particular, we show that increases in standard measures of cash flow risk predict exploitation of new opportunities by specialized firms, while increases in product market risk (i.e., the risk of preemption by competitors) predict exploitation by incumbents. We also show that alliances organized as licensing agreements or revenue sharing contracts sometimes better balance the different sources of value, and thus may dominate more traditional forms of organization. These key results arise from the dynamic interaction of the new opportunity’s option-like features with realistic competitive forces.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2443868

Number of Pages in PDF File: 52

Keywords: capital structure, corporate investment, organizational design, real options

JEL Classification: G13, G31, G32, G33

working papers series





Download This Paper

Date posted: February 23, 2011 ; Last revised: May 30, 2014

Suggested Citation

Hackbarth, Dirk and Mathews, Richmond D. and Robinson, David T., Capital Structure, Product Market Dynamics, and the Boundaries of the Firm (July 2, 2012). AFA 2012 Chicago Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1767483 or http://dx.doi.org/10.2139/ssrn.1767483

Contact Information

Dirk Hackbarth (Contact Author)
Boston University School of Management ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
(617) 358-4206 (Phone)
(617) 353-6667 (Fax)
HOME PAGE: http://people.bu.edu/dhackbar/
Richmond D. Mathews
University of Maryland - Department of Finance ( email )
Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States
David T. Robinson
Fuqua School of Business, Duke University ( email )
100 Fuqua Drive
Durham, NC 27708-0120
United States
919-660-8023 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Feedback to SSRN


Paper statistics
Abstract Views: 2,253
Downloads: 496
Download Rank: 31,351
References:  35
Citations:  1

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo4 in 0.547 seconds