Vertical flexibility, outsourcing and the financial choices of the firm

Michele Moretto and G. Rossini

Working Papers from Dipartimento Scienze Economiche, Universita' di Bologna

Abstract: We investigate the relationship between the extent of vertical flexibility and the underlying financial choices of a firm. By vertical flexibility we mean the opportunity to outsource a necessary input and to reverse the choice as input market conditions dictate. A firm simultaneously selects the portion of equity and debt and its vertical setting. Debt is provided by a lender that requires the payment of a fixed coupon over time and, as a collateral, an option to buy out the firm in certain circumstances. Debt leads to the same level of flexibility acquired by an unlevered firm. However, investment to set up a flexible technology occurs earlier. An alternative to debt is the involvement of venture capital for the production of the input. We explore this second avenue finding that the extent of outsourcing adopted is lower than for the unlevered firm, but the firm invests earlier.

JEL-codes: C61 G31 G32 L24 (search for similar items in EconPapers)
Date: 2015-06
New Economics Papers: this item is included in nep-bec and nep-cfn
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