(Wiley, 2022-05-29) Santaló, Juan; Folta, Timothy; Giarratana, Marco; Dickler, Teresa; Spanish Ministry of Science and Innovation; Agencia Estatal de Investigación; https://ror.org/02jjdwm75
Whether diversified firms have advantages over their single-business counterparts is the focus of much research in strategic management. Indeed, there is sparse evidence that corporate advantage exists, on average. We explore one potential driver of corporate advantage—that multi-business firms have more flexibility than single-business firms to cope with uncertainty, because they can internally redeploy resources across businesses. Using Compustat data, we show that uncertainty increases the relative advantage of multi-business firms, a finding robust to controls for endogeneity. Consequently, the paper provides important insight and evidence around when corporate advantage might obtain. Moreover, we find that growth option value is accentuated in the presence of switching flexibility. Finally, multi-business firms with redeployment experience and businesses with more inversely correlated returns benefit more from uncertainty.
