Making, Buying and Concurrent Sourcing: Implications for Operating Leverage and Stock Beta

Forthcoming, Review of Finance

50 Pages Posted: 18 Nov 2011 Last revised: 30 Apr 2015

See all articles by Bart M. Lambrecht

Bart M. Lambrecht

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Grzegorz Pawlina

Lancaster University - Department of Accounting and Finance

João C. A. Teixeira

University of the Azores - School of Business and Economics

Date Written: April 30, 2015

Abstract

We present a real options model of a firm's make-or-buy decision under demand uncertainty. "Making" is subject to decreasing returns to scale, fixed costs and capital investment. "Buying" happens at a fixed price and requires no investment. Three distinct procurement regimes endogenously arise: buying, making or concurrent sourcing for, respectively, low, intermediate and high demand. Capital constraints encourage buying or concurrent sourcing. Operating leverage peaks when the firm switches between buying and making, and it is lowest (and negative) at the switch between making and concurrent sourcing. This non-monotonic pattern mirrors and drives the behavior of the firm's beta.

Keywords: sourcing, operating flexibility, operating leverage, stock beta

JEL Classification: D24, D81, G31, L23

Suggested Citation

Lambrecht, Bart and Pawlina, Grzegorz and Teixeira, João C. A., Making, Buying and Concurrent Sourcing: Implications for Operating Leverage and Stock Beta (April 30, 2015). Forthcoming, Review of Finance. Available at SSRN: https://ssrn.com/abstract=1571223 or http://dx.doi.org/10.2139/ssrn.1571223

Bart Lambrecht (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
44-(0)-1223-339700 (Phone)
44-(0)-1223-339701 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Grzegorz Pawlina

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+ 44 1524 592834 (Phone)
+ 44 1524 847321 (Fax)

João C. A. Teixeira

University of the Azores - School of Business and Economics ( email )

Rua Mãe de Deus, s/n
9501-801 Ponta Delgada Azores
Portugal

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