Investing in capabilities: bidding in strategic factor markets with costly information

Abstract

We explore how firms invest in capabilities by acquiring assets in strategic factor markets. We formalize the problem using an auction model in which heterogeneous firms bid for an asset to investigate relationships among expected returns to the investment, information used to estimate the expected returns and information used to estimate the expected bids from competitors. Our results demonstrate the importance of recognizing different components of the expected returns and the importance of considering the cost of acquiring information to inform the bid. Through this analysis we illustrate complementarities and trade-offs that are involved in the process of making investment decisions. Copyright © 2008 John Wiley & Sons, Ltd.

Stock market undervaluation of resource redeployability

“…Such illegitimacy stems from the uniqueness of the firm's identity, which Zuckerman () exemplified with unique sets of businesses in diversified firms. While Maritan and Florence (: 229) speculated that redeployability is more susceptible to inefficient valuation than complementarity, this study is agnostic about that comparison and leaves its resolution to empirical tests. Besides complementarity, research on intangible assets highlighted that they are susceptible to undervaluation due to “causal ambiguity” (Dierickx & Cool, ), “social complexity” (Barney, ), and a lack of credible accounting records (Aboody & Lev, ).…”

“…The analysis focuses on a specific source of undervaluation, resource redeployability , an option for a firm to withdraw resources from its business and switch them to another business (Sakhartov & Folta, ). The focus on redeployability is pertinent because that option was deemed to involve the highest uncertainty that reduces the efficiency of valuation (Maritan & Florence, , p. 229), and because existence of untried uses for resources was named the key condition for mispricing (Denrell, Fang, & Winter, , p. 982). Moreover, efficient valuation of resources in stock markets implies that, based on publicly available data, market players form a probability distribution for uncertainty involved in the use of the resources and update their estimates, instantly and accurately, upon arrival of new data.…”

How do strategic factor markets respond to rivalry in the product market?

“…Sellers develop resources independently and noncooperatively before selling them in auctions that are held simultaneously. Previous work has used auctions to model factor markets (Makadok, ; Maritan and Florence, ), which describes well markets where sellers set out to generate competition among buyers, as is often the case in factor markets…”

“…Sellers develop resources independently and noncooperatively before selling them in auctions that are held simultaneously. Previous work has used auctions to model factor markets (Makadok, 2001;Maritan and Florence, 2008), which describes well markets where sellers set out to generate competition among buyers, as is often the case in factor markets. 3 The time line of the game is as follows: Their profits are affected by the quality of the resources they own and by the quality of the resources their competitor owns.…”

“…The extant strategic management literature has examined strategic factor markets to explain when resource buyers could make an economic profit (Barney, 1986). In particular, this research has made great strides investigating the role of differences in information about returns (Denrell et al, 2003;Makadok, 2001;Makadok and Barney, 2001;Maritan and Florence, 2008;Ross, 2012) and of buyer-resources synergies (Adegbesan, 2009;Barney, 1988).…”