When Theory Doesn't Meet Practice: Do Firms Really Stage Their Investments?

Ragozzino, R. and Moschieri, C. When Theory Doesn’t Meet Practice: Do Firms Really Stage Their Investments? 2014. Academy of Management Perspectives, Vol. 28: 22-37

Posted: 9 Apr 2014

See all articles by Roberto Ragozzino

Roberto Ragozzino

Nova School of Business and Economics

Caterina Moschieri

Fundación Instituto de Empresa, S.L.

Date Written: April 8, 2014

Abstract

Theory has often discussed the benefits of adopting a staged investment strategy in mergers and acquisitions when investments hold uncertain prospects. Specifically, firms should enter into a cooperative agreement, such as a strategic alliance, before they eventually decide to buy out a partner. In this paper, we first review the theoretical arguments supporting such an approach and then provide evidence showing that staged investments in mergers and acquisitions are far less frequent than theory predicts. We analyze a sample of 24,495 global transactions that occurred between 1995 and 2010 and find that firms stage mergers and acquisitions in only 1.26% of all deals. This figure changes little after we control for transaction- and environmental-level considerations. We propose several explanations of why staged investments are seldom used in practice, despite their theoretical properties.

Keywords: staged investments, real option, acquisitions

Suggested Citation

Ragozzino, Roberto and Moschieri, Caterina, When Theory Doesn't Meet Practice: Do Firms Really Stage Their Investments? (April 8, 2014). Ragozzino, R. and Moschieri, C. When Theory Doesn’t Meet Practice: Do Firms Really Stage Their Investments? 2014. Academy of Management Perspectives, Vol. 28: 22-37 , Available at SSRN: https://ssrn.com/abstract=2422319

Roberto Ragozzino (Contact Author)

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

Caterina Moschieri

Fundación Instituto de Empresa, S.L. ( email )

Madrid
Spain

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