Making, buying and concurrent sourcing: implications for operating leverage and stock beta


Type
Article
Change log
Authors
Lambrecht, BMAC 
Pawlina, G 
Teixeira, JCA 
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.

Description
Keywords
sourcing, operating flexibility, operating leverage, stock beta
Journal Title
Review of Finance
Conference Name
Journal ISSN
1875-824X
1573-692X
Volume Title
20
Publisher
Oxford University Press (OUP)
Sponsorship
Lambrecht and Pawlina thank the ESRC (grant RES-062-23-0078) and Teixeira thanks Portuguese Foundation for Science and Technology (BD/12193/2003) for financial support.