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Financing flexibility: The case of outsourcing

Luca Di Corato (), Michele Moretto () and Gianpaolo Rossini

Journal of Economic Dynamics and Control, 2017, vol. 76, issue C, 35-65

Abstract: We investigate the relationship between the extent and timing of vertical flexibility and the financial choices of a firm. By vertical flexibility we mean partial/total and reversible outsourcing of a necessary input. A firm simultaneously selects the vertical setting and the financial sources of investment in flexibility, in particular debt and venture capital. A loan may come from a lender that requires the payment of a fixed coupon over time and an option to buy out the firm in certain circumstances. Debt leads to the same level of flexibility of an unlevered firm. Yet investment occurs earlier. The injection of venture capital reduces the quest for vertical flexibility and speeds up investment. Then, there arises a fresh substitutability between a financial (venture capital) and a real variable (vertical flexibility).

Keywords: Vertical integration; Flexible outsourcing; Debt; Equity and Venture capital; Real options (search for similar items in EconPapers)
JEL-codes: C61 G31 G32 L24 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.jedc.2016.12.009

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