Rights statement: This is a pre-copy-editing, author-produced PDF of an article accepted for publication in Review of Finance following peer review. The definitive publisher-authenticated versionBart M. Lambrecht, Grzegorz Pawlina, and João C. A. Teixeira Making, Buying, and Concurrent Sourcing: Implications for Operating Leverage and Stock Beta Review of Finance (2016) 20 (3): 1013-1043 first published online July 3, 2015 doi:10.1093/rof/rfv027 is available online at: http://rof.oxfordjournals.org/content/20/3/1013
Accepted author manuscript, 818 KB, PDF document
Available under license: CC BY: Creative Commons Attribution 4.0 International License
Final published version
Licence: CC BY: Creative Commons Attribution 4.0 International License
Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
}
TY - JOUR
T1 - Making, buying and concurrent sourcing
T2 - implications for operating leverage and stock beta
AU - Lambrecht, Bart
AU - Pawlina, Grzegorz
AU - Teixeira, Joao
N1 - This is a pre-copy-editing, author-produced PDF of an article accepted for publication in Review of Finance following peer review. The definitive publisher-authenticated versionBart M. Lambrecht, Grzegorz Pawlina, and João C. A. Teixeira Making, Buying, and Concurrent Sourcing: Implications for Operating Leverage and Stock Beta Review of Finance (2016) 20 (3): 1013-1043 first published online July 3, 2015 doi:10.1093/rof/rfv027 is available online at: http://rof.oxfordjournals.org/content/20/3/1013
PY - 2016/5
Y1 - 2016/5
N2 - 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.
AB - 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.
U2 - 10.1093/rof/rfv027
DO - 10.1093/rof/rfv027
M3 - Journal article
VL - 20
SP - 1013
EP - 1043
JO - Review of Finance
JF - Review of Finance
SN - 1572-3097
IS - 3
ER -