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

Lambrecht, Bart and Pawlina, Grzegorz and Teixeira, Joao (2016) Making, buying and concurrent sourcing : implications for operating leverage and stock beta. Review of Finance, 20 (3). pp. 1013-1043. ISSN 1572-3097

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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.

Item Type:
Journal Article
Journal or Publication Title:
Review of Finance
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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:
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15 Dec 2014 15:27
Last Modified:
16 Apr 2024 00:38