Asymmetric Valuation of Redeployable Resources by Firm Insiders and Outsiders

Abstract

This paper explains the effects of resource redeployability on the asymmetric valuation of a firm’s resources by insiders and outsiders. I emphasize that the asymmetric valuation of resources results from uncertainty that investors face about the cost of switching those resources to alternative markets. This view extends existing focus on intangible resources as a source of information asymmetries around a firm’s value. I use a valuation model to explicate how redeployability asymmetrically affects valuation of tangible resources by insiders and outsiders. I formally evaluate the impacts of three determinants of redeployability — switching costs, correlation of market returns, and uncertainty of returns — on the asymmetric valuation. This explication enables me to demonstrate the paradox that more redeployable resources give managers more valuable flexibility but may cause financing difficulties due to the opaqueness of such flexibility to investors. The explication also facilitates understanding of existence of opportunities for rents in the strategic factor markets. In addition to providing theoretical insight, my results have important empirical and managerial implications.