The Market Value of Product Flexibility: Theory and Evidence from the Clean Energy Industry

30 Pages Posted: 16 Jul 2016

See all articles by Jane Davies

Jane Davies

Boston University - Questrom School of Business

Nitin Joglekar

Boston University - Questrom School of Business

Date Written: March 15, 2013

Abstract

We identify three broad types of decisions for creating product flexibility: market selection, whereby managers can diversify their product portfolios across multiple segments in order to hedge against market uncertainties; resource allocation, through which managers assign R&D and marketing resources or retain a level of liquidity; and production flexibility, wherein managers have options to rapidly revise operational decisions. We offer an integrated framework bridging these decisions and consider their impact on firm valuation in the capital market. We test this framework on a sample of 174 firms, for 2002-2007 from the clean energy sector. Our results replicate earlier findings on the relationship between diversification and market valuation when tested in a standalone manner. However, an enhanced analysis illustrates that established results are supported in limited settings. Instead, we find that resource allocation and production flexibility choices, e.g. product modularity, capacity and JIT, are significantly associated with variation in market valuation.

Keywords: Flexibility, Diversification, Modularity, Organizational Slack, Valuation, Clean Energy

JEL Classification: L50, M11, M13, O32, Q42

Suggested Citation

Davies, Jane and Joglekar, Nitin, The Market Value of Product Flexibility: Theory and Evidence from the Clean Energy Industry (March 15, 2013). Available at SSRN: https://ssrn.com/abstract=2810216 or http://dx.doi.org/10.2139/ssrn.2810216

Jane Davies

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

Nitin Joglekar (Contact Author)

Boston University - Questrom School of Business ( email )

595 Commonwealth Ave
Boston, MA 02466
United States

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