The Market Value of Product Flexibility: Theory and Evidence from the Clean Energy Industry

Abstract

We identify three broad types of decisions for creating product flexibility: market selection, whereby managers can diversify their product portfolios across multiple segments in order to hedge against market uncertainties; resource allocation, through which managers assign RD and production flexibility, wherein managers have options to rapidly revise operational decisions. We offer an integrated framework bridging these decisions and consider their impact on firm valuation in the capital market. We test this framework on a sample of 174 firms, for 2002-2007 from the clean energy sector. Our results replicate earlier findings on the relationship between diversification and market valuation when tested in a standalone manner. However, an enhanced analysis illustrates that established results are supported in limited settings. Instead, we find that resource allocation and production flexibility choices, e.g. product modularity, capacity and JIT, are significantly associated with variation in market valuation.