IS MY FIRM-SPECIFIC INVESTMENT PROTECTED? OVERCOMING … 2018/Session 4... · stakeholder FSIs by...

Q Academy of Management Review2018, Vol. 43, No. 2, 284–306.https://doi.org/10.5465/amr.2015.0411

IS MY FIRM-SPECIFIC INVESTMENT PROTECTED?OVERCOMING THE STAKEHOLDER INVESTMENT DILEMMA IN

THE RESOURCE-BASED VIEW

ROBERT E. HOSKISSONENI GAMBETA

COLBY D. GREENTOBY X. LI

Rice University

The resource-based view posits that firms achieve competitive advantage from valuecreation through firm-specific investments held by key stakeholders: employees, suppliers,and customers. Shareholder-dominant (agency) theory holds that all residual incomeclaimant rights belong to shareholders, circumscribing other key stakeholders’ ability toappropriate value from their investment. However, recent enhancements to stakeholdertheory grounded in property rights suggest that such stakeholders may need protection forimplicit residual claims. A central purpose of this article is to build a model of the pro-tection devices used to ensure these implicit rights. Individual ex ante devices such asstakeholder ownership only partially incentivize stakeholders’ firm-specific investmentsbecause they are subject to two types of uncertainties—behavioral and environmental—and individual devices aimed at reducing one type of uncertainty may exacerbate theother. We therefore expand on efforts to establish a stakeholder theory of strategic man-agement by proposing an integratedmodel of protection devices, which seeks to overcomethe incentive dilemma in reducing both uncertainties by reducing barriers to stakeholderfirm-specific investment. Our model also explores the conflicts and complementaritiesassociated with device implementation. Finally, we discuss theoretical and practical im-plications, as well as future research opportunities associated with our model.

Incentivizing stakeholders to make firm-specificinvestments (FSIs) is a central issue in the resource-based view (RBV). According to the RBV (Barney,1991), a firm achieves sustained competitive ad-vantage through unique bundles of resources thatare often created by key stakeholder FSIs (Wang &Barney, 2006), thereby allowing the firm to enjoyefficiencies vis-a-vis other firms.1 The firm needs

stakeholders to make FSIs within the firm to obtaina resource-basedcompetitiveadvantage; therefore,incentives for stakeholders to make FSIs are animportant foundation for the RBV. The fundamentalquestion of how to incentivize stakeholders tomakeFSIs remains central to any theory of competitiveadvantage, given the dilemma surrounding them.As Coff and Raffiee explain, “A dilemma existsbecause the very same reasons that firms wantemployees [or other stakeholders] to develop firm-specific skills may simultaneously make em-ployees [or other stakeholders] reluctant to do so”(2015: 328). By definition, FSIs are more valuable tothe focal firm than to other firms.As a result, the firm can engage in behavioral

opportunism vis-a-vis its stakeholders. The firmcan appropriate value and quasi-rents using itsbargaining position, since stakeholders, oncehaving made an FSI, cannot obtain value fromoutside the focal firm. This potential for holdup candisincentivize stakeholders from committing theirFSIs ex ante. Protections for stakeholders aretherefore required. Related insights have led to re-cent efforts to shore up the theoretical link betweenstakeholders and the value creation–appropriation

All authors contributed equally in developing this manu-script. We are grateful for feedback provided by Jeff Harrisonand Heli Wang on earlier drafts of the paper. We also ac-knowledge the helpful and developmental feedback providedby former associate editor Mike Pfarrer and three anonymousreviewers.

1 We acknowledge that value creation is possible throughother theoretical approaches, such as entrepreneurial activityand creative destruction (e.g., Makadok, 2010), but our focus ison sustained competitive advantage as emphasized in theRBV. Additionally, we acknowledge that sustained competi-tive advantage in the RBV can also be achieved through mo-nopoly rents—that is, a monopolistic position a firm enjoysover a resource (Peteraf, 1993). However, we are specificallydealing with the case where such rents are generated throughanFSI, since this is the condition inwhich the “FSI dilemma” ismanifested.

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https://doi.org/10.5465/amr.2015.0411

problem (Asher, Mahoney, & Mahoney, 2005; Klein,Mahoney,McGahan,&Pitelis, 2012;Mahoney, 2012;Stout, 2012) in which the firm is characterized as a“nexusofexplicit and implicit contracts” (Mahoney,2012: 162) or even a “nexus of firm-specific in-vestments” (Blair & Stout, 1999: 275). As applied tothe RBV, this view of the firm invites an examina-tion of the prominent protections needed to inducekey stakeholders to make FSIs.

Several protection devices have been pro-posed to alleviate and resolve the stakeholderFSI dilemma, using various theoretical lenses ineconomics and finance (e.g., Grossman & Hart,1986; Hart & Moore, 1990; Rajan & Zingales, 1998;Williamson, 1975, 1985), corporate law (e.g., Blair& Stout, 1999, 2001), and human capital (e.g.,Becker, 1964; Lazear, 2009) theories. However,because of different assumptions or emphaseson a particular stakeholder group (Clark, 1985),scholars from different fields have generally pro-posed protection devices in isolation that arepartial solutions to incentivizing stakeholders tomake FSIs. In this articlewe are not so ambitiousas to unify these disparate bodies of literatureand theories, nor is it our intention to simplyreview the plethora of protection devices thathave been documented. However, considerationof how prominent devices work together is nec-essary to understand value creation throughmultistakeholder FSIs.

A central purpose of this article is to contributeto the RBV by examining how firms can in-centivize key stakeholders in investing in thefirm to derive FSI-based competitive advantage.Building on different perspectives, we contributeto the RBV, as well as to an emerging stakeholdertheory of strategic management, by developinga framework of contractual and noncontractualdevices and demonstrating how they inducestakeholder FSIs by protecting their ability to ap-propriate value. Likewise, our theory provides afoundation for the development of a governancetheory for stakeholders, which ultimately allowsfirm prescription for an idiosyncratic mix of pro-tection devices, depending on the firm’s situation.

In developing our integrated framework, wefirst categorize the protection devices into twogroupings, according to the assumptions madeby previous researchers from a variety of fields:(1) whether threats to the stakeholder’s value ap-propriation can be addressed ex ante (prior to in-vestment) or ex post (following investment) and(2) whether threats to the stakeholder’s value

appropriation arise primarily from behavioral un-certainty or environmental uncertainty. Second,we examine the effects of these protection deviceson theFSIsof the threeprimarystakeholdergroupsin the firm’s value chain: employees, suppliers,and customers. This categorization allows us toexamine the devices’ interaction with respect tothe primary sources of the FSI dilemma (behav-ioral orenvironmentaluncertainty), aswellaswithrespect to each of the primary firm stakeholders.Our integrated theoretical framework yields

three novel theoretical contributions. First, wedemonstrate that each of these devices, takenin isolation, is insufficient to overcome the di-lemma of stakeholder FSI because each ex antedevice individually creates counteractive effectson the two types of uncertainties. Ex ante devicesintended to reduce behavioral uncertainty, forinstance, simultaneously increase stakeholders’exposure to environmental uncertainty. Like-wise, protections to reduce stakeholder expo-sure to environmental uncertainty entail theirown trade-offs in increasing stakeholder be-havioral uncertainty. Firmsmay then be stuck ina “trap” where alleviating one type of stake-holder uncertainty aggravates another source ofuncertainty for FSI. Thus, the stakeholder FSIdilemma remains unresolved, limiting realizedfirm value.Second, drawing insight from theRBV that firms

face causal ambiguity internal to the firm, wedevelop a theory of how ex post devices can beintegrated with ex ante devices to provide a reso-lution to the FSI dilemma and overcome the in-centive trap associated with ex ante devicesalone. These ex post devices are critical for facil-itating and ensuring stakeholder FSI propertyrights essential for value creation. Thus, our in-tegrated framework develops arguments thathighlight the need for understanding why firmsneed to implement multiple ex ante and ex postprotection devices that work in concert forstakeholders.Third, the implications of this model are that an

appropriate mix of ex ante and ex post protectiondevices can be designed by the focal firm,depending on its idiosyncratic conditions. Inshort, our model provides the framework neces-sary to conduct a case-specific analysis of ap-propriate protection devices in the stakeholdertheory of strategic management to engage itsrelevant stakeholders in maximizing competitiveadvantage (Mahoney, 2012: 161). In the next

2018 285Hoskisson, Gambeta, Green, and Li

section we provide more detail regarding ouroverall theoretical arguments and introduce ourmodel.

THEORETICAL BACKGROUND ANDMODEL DEVELOPMENT

When a firm’s stakeholders make investmentsin firm-specific assets, they contribute to thefirm’s unique bundles of resources (e.g., Coff &Kryscynski, 2011; Wang & Barney, 2006). Accordingto the RBV, these unique and valuable bundles ofresources generate a sustained competitive ad-vantage for the firm (Barney, 1991). However, FSI isa concept that predates the RBV inmany economicsubdisciplines, suchas transactioncost economics(TCE; Williamson, 1975) and human capital theory(Becker, 1964). Further, as far backasBarnard (1938)and, subsequently, Simon (1952), there have beenstrong suggestions that firms need to provide “in-ducements for contribution” by stakeholders.

Although FSIs can be beneficial from the per-spective of both the investing firm and thestakeholder, a conflict between these two partiesbecomes apparent: either the firm or the stake-holder benefits from FSIs largely to the extentthat one party can hold the other hostage andappropriate the quasi-rents generated from theinvestment. Value is created when stakeholdersmake FSIs because these investments are diffi-cult to imitate, which allows the firm to avoidfactor market competition for the investmentand, thus, generate economic rents (Barney, 1986,1991). However, this inability of stakeholders totransfer the value of their investments in factormarkets may subject the stakeholder to firmholdup and an inability to appropriate value expost. Anticipating this problem, stakeholdersmay be unwilling ex ante to make sufficient FSIsfor value creation in the first place. On the otherhand, as holders of value-generating FSIs,stakeholders may increase their bargainingpower over the focal firm (Coff, 1999; Porter, 1980;Williamson, 1975, 1985). The result can also bemutual holdup, which can at times be beneficialin preventing either side from taking advantageof the other, but itmay not universally resolve themultitude of appropriation and adaptation is-sues related to FSIs (Williamson, 1983: 537).

The challenge of resolving the FSI dilemmafor stakeholders is central to various economic(Alchian & Demsetz, 1972; Grossman & Hart,1986; Hart &Moore, 1990; Jensen &Meckling, 1976;

Rajan & Zingales, 1998; Williamson, 1975, 1985),legal (Blair & Stout, 1999, 2001), and human capital(Becker, 1964; Lazear, 2009; Wasmer, 2006) theories.In fact, this challenge can be considered one of theprimary issues in theories of the firm.2 Alchian andDemsetz (1972)wereamong the first to formulate theproblem of multiple investing “stakeholders,” whofaced theproblemofmutualholdupanduncertaintysurrounding value appropriation and generation(although the problem had also been identifiedearlier by Coase [1937]). Various theoretical solu-tionshavebeenproposedsince then.Agency theory(Jensen&Meckling, 1976) proposes that the solutionto incentivizingall stakeholders to exert effort in thefirm can be resolved ex ante by drawing up com-plete contracts, which allocate ownership and re-sidual claimant rights, thus resolving the problemand leaving no need to consider ex post holdups.This approach has been criticized and extended byincomplete contract theory (Grossman & Hart, 1986;Hart & Moore, 1990), which highlights the fact thatcontracts are almost never ex ante complete and expost holdups are ubiquitous. Incomplete contracttheory scholarsargue that expost solutionsmustbefound to the holdup problem related to stakeholderFSI. One such solution is to assign property (de-cision) rights to one party that retains the ability toresolve ex post holdup. From this perspective, twoparties agree to make FSIs knowing that they can-not resolve the dilemma ex ante, but authority isgiven to one particular party to resolve emergingissues (e.g., Carson & John, 2013).However, this approach assumes that decision

rights can be efficiently allocated ex ante, an as-sumption that has received significant criticismbecause it does not consider the possibility thatsuch property rightsmay be inefficiently allocated(Carson & John, 2013; Tirole, 1999). This criticism isparticularly relevant to the RBV, where causalambiguity internal to the organization implies thatnone of the actors may know ex ante what thevalue of their contribution may be or how it willevolve. Among the viable solutions is the assign-ment of decision rights to a “mediating hierarchy”empowered to protect stakeholder interests andresolve their disputes ex post (Blair & Stout, 1999),and whose effectiveness relies on its fiduciary re-sponsibility and legal case precedent to protect

2 The primary goal of these theories, however, is explainingthe boundaries of the firm, rather than explaining sustainedcompetitive advantage, which is the central objective of theRBV (Barney, 1991).

286 AprilAcademy of Management Review

stakeholder interests (Blair, 2005; Clark, 1985).These theoretical perspectives have spawned alarge body of literature in various fields, in whichthese theoretical arguments have been developedinto specific devices for inducing a particularstakeholdergroup tomakeFSIs.However,becauseof the varying natures of the disciplines and theirassumptions, most of these devices (described insubsequent sections) are considered in isolationand are aimed at overcoming specific aspects ofthe FSI dilemma for specific stakeholders.

Emerging research toward a stakeholder theoryof strategicmanagement draws on property rightstheory to argue that stakeholders’ FSIs may gen-erate a “residual interest that is not ex ante con-tractually bargained over and it is not ex postperfectly allocated” (Mahoney, 2012: 155). This newstakeholder theoretical approach extends theoriginal stakeholder theory formulation (Freeman,1984), as well as its instrumental form (Harrison,Bosse, & Phillips, 2010), by incorporating propertyrights insights from the theories discussed above,and it recognizes the firm as a “nexus of firm-specific investments” (Blair & Stout, 1999: 275) fromwhich value appropriation issues stemming fromFSIs affect the overall firm value. This emergentliterature, thus, has begun to demonstrate thevalue of a property rights–influenced stakeholderperspective within the RBV.

This property rights–based stakeholder ap-proach has provided a foundation from which todevelop a more coherent and unified frameworkof protection devices that contribute to a firm’scompetitive advantage and realized value crea-tion. While the theoretical link between the RBVand stakeholder FSI and the associated pro-tections aimed at incentivizing such investmentshave been developed, much of the literature hasfocused on either providing piecemeal solutionsor listing multiple solutions from multiple theo-ries. However, aggregating these devices into anundifferentiated list has been criticized for itsbroadness and lack of clarity (Blair, 2005; Kleinet al., 2012). When the solutions are offeredpiecemeal, it is unclearwhymultipledevicesmaybe needed for multiple stakeholders (or the samestakeholder). Among the challenges is reconcil-ing the need to fairly distribute property rights tothe deserving invested parties and RBV’s as-sumption of causal ambiguity that makes identi-fying those deserving parties difficult. Propertyrights protections for key stakeholders are there-fore needed, but theyprovide only partial solutions

to alleviating stakeholders’ appropriation con-cerns.Relianceon theseproperty rightsprotectionscan even exacerbate those concerns and, hence,can be counterproductive to incentivizing stake-holder FSI and depress overall firm value creation.What is needed is a comprehensive theoreticalmodeldetailinghowindividualdevicesaffecteachother in complementary and conflicting ways and,more important, how they can work in concert toresolve the FSI dilemma for stakeholders.Creatingsuch a model can help close the “economic gapbetween ‘potential’ and ‘realized values’” (Kim &Mahoney, 2002: 225) and can ultimately generatea sustained competitive advantage.The model in Figure 1 is intended to address

these gaps in the theory. We consider the paththrough which each of the proposed protectiondevices induces stakeholder groups (employees,suppliers, and customers) to make FSIs by eitherreducing the stakeholder’s behavioral uncertaintyor reducing its exposure to environmental un-certainty. Many individual solutions have focusedprimarily on behavioral uncertainty and have de-voted less attention to the equally important envi-ronmental uncertainty around the actual realizedvalue of the investment. Overall, we demonstratewhy the individual piecemeal approach is in-sufficient to address both sources of uncertainty,and, likewise, we explore why firms need to con-sider the interplay of these devices in reducingeach type of uncertainty for multiple stakeholders.As previously mentioned, making an FSI ex-

poses the firm’s stakeholders to several un-certainties, thus necessitating the provision ofvarious protective devices to incentivize their FSIengagement and continuity. Uncertainty de-scribes a situation in which information aboutfuture states of the world is lacking because theprobabilities of outcomes are difficult to calculateor impossible to imagine (Knight, 1921). The un-certainties surrounding FSI are central to theeconomic theories previously described. For ex-ample, TCE describes the FSI dilemma as arisingbroadly from behavioral and/or environmentaluncertainties (Krishnan, Geyskens, & Steenkamp,2016; Williamson, 1985). These uncertainties havebeenalluded to since thework of Becker (1964) andcan be more precisely found in Hashimoto (1981).

Behavioral Uncertainty and FSI

Behavioral uncertainty, on the one hand, isex ante uncertainty about the postinvestment


behavior of the firm (Hashimoto, 1981: 475; Poppo,Zhuo,& Li, 2016; Schepker,Oh,Martynov, &Poppo,2014; Wang & Barney, 2006). Such uncertainty ex-istswhen the focal stakeholder lacks the ability todetermine how the firm will behave after thestakeholder makes an FSI. For example, the pos-sibility that the firm may terminate an employeeafter making an FSI, or that the firm may appro-priate the entire value of the investment, consti-tutes firm-opportunistic behavior. High uncertaintyabout a firm’s opportunistic behavior reduces thestakeholder’s willingness to make an FSI. Em-ployees, for example, will be reluctant to commitex ante to invest in an FSI acquired through effortand time and forgoing other opportunities ifdoubts exist that future managerial actionsmay deprive them of fruits generated by theirinvestments.

Environmental Uncertainty and FSI

Environmental uncertainty, on the other hand,refers to ex ante uncertainty about the value of theinvestment itself (Hashimoto, 1981: 478; Wang &

Barney, 2006: 470). Such uncertainty exists when itis difficult to determine what the eventual valuecreated by the FSI will be, given the inability toaccurately predict future states of the world. Suchuncertainty may arise from shifts in the techno-logical and political landscape, changes in mar-ket demand or composition of rivalry, or even rareevents that create unforeseeable shocks. Un-expected or unpredictable changes in the envi-ronment may reduce or eliminate the potentialvalue of an investment; thus, the stakeholder whoinvested time and energy in generating the in-vestment may be left with no (or reduced) value toappropriate and may have nowhere else to re-deploy this investment since it is firm specific.Such uncertainty is determined by factors oftenoutside the firm’s control, so the effect of the pro-tection devices is to reduce the stakeholders’ ex-posure to such environmental “shocks.” Forexample, although the firm may not be able to domuch about demanduncertainty, it can take stepsex ante to reduce the exposure of stakeholders todemand uncertainty. However, environmentaluncertainty may not always be exogenous. For

FIGURE 1Protection Devices That Promote Stakeholder FSI

P6 (–)

Property rights allocation

Equity ownership

Relational governance

Joint ventures

Customer propertyrights

Monitoring

(–)P1

P2

P4

P5 (–)

(–)

(+)

(+)

P3

Resource depreciation

Diversification

Cost-plus contracting

Takeover protection

P7 (–)

Employees

Suppliers

Customers

Environmental uncertaintyas a barrier to FSIs

Behavioral uncertainty as abarrier to FSIs


example, stakeholders face environmental un-certainty when they cannot accurately determinethe impact of managerial actions on the value ofthe FSI or the firm as a whole. Thus, environ-mental uncertainty threatens stakeholder FSIsbecause unforeseen conditions or misdirectedmanagerial action may reduce the potential forvalue capture.

Behavioral and environmental uncertaintiesare the primary hazard barriers that need to beaddressed by the firm to incentivize stakeholderFSIs.We examine how common devices proposedin the extant literature address each type of un-certainty for the primary stakeholders, creatingconflict among the effects the devices might haveon the two types of uncertainties, and we assesshow these devices might also complement eachother.

DEVICES PROTECTING STAKEHOLDER FSI

As illustrated in Figure 1, we organize devicesfrom the extant literature into categories alongtwo dimensions. First, we categorize devicesaccording to the stage (relative to theFSI) inwhichthe device functions. We group these devices intoex ante and ex post devices; ex ante devices re-assure the stakeholder who is making the FSI bylaying out the rules of value appropriation prior tothe FSI decision, whereas ex post devices re-assure stakeholders by providing for an ex postbargaining process after the decision to make anFSI and also reassure them that the firm will notunilaterally expropriate their investment. Sec-ond, we categorize devices according to the typeof uncertainty (behavioral or environmental) theyare intended to reduce. Overall, we focus on thestakeholders most likely to make valuable FSIsthat are members of the firm’s value chain—thatis, employees, suppliers, and customers (Wang,Barney, & Reuer, 2003).

Ex Ante Property Rights Allocation Devices

The problem of reducing behavioral uncertaintyfor stakeholder FSIs is generally resolved by a setof protection devices that can broadly be charac-terized as property rights allocation devices (seeFigure 1). The most common of these propertyrights allocation devices include high levels ofemployee equity ownership (i.e., residual claimsto firm profits; Wang, He, & Mahoney, 2009), long-term contracts (e.g., alliances) and joint ventures

for critical suppliers making FSIs (Lumineau &Henderson, 2012; Williamson, 1985), and co-operatives for customers (Hansmann, 1988). Theprotection devices in this category share the com-mon mechanism of providing a “stake”—a prop-erty right in the firm—to the relevant stakeholder(Wangetal., 2003).Theseproperty rightsprovideexante reassurance that the firm will not engageopportunistically and reduce behavioral un-certainty by decreasing the firm’s ability to hold“hostage” stakeholder FSIs. Below we explain ingreater detail how the most common devices re-duce behavioral uncertainty for each stakeholder.Equity ownership and profit-sharing plans.

Equity ownership provides residual claimantproperty rights to employees, giving them an exante contractual guarantee that they are entitledto and will receive a particular share of the valuethat is generated within the firm, therefore help-ing alleviate behavioral uncertainty by removingthe possibility that managers may unilaterallydecide to withhold value generated from their FSI(French, 1987; Grossman & Hart, 1986). This pro-tectiondevice is aneconomic-basedsolutionbuilton property rights theory (Barzel, 1989; Demsetz,1967; Libecap, 1989). Employee equity ownershipmay also be agreeable to other shareholders be-cause it induces FSIs and, thus, maximizes firmvalue. Employee equity ownership can be pro-vided through several formal and informal chan-nels, such as employee share ownership plans,401k contribution plans, or open market pur-chases of a firm’s stock by individual employees.Although there is some evidence that these in-centives may increase shirking (Klor, Kube,Winter, & Zultan, 2014), employee equity owner-ship and profit sharing have been shown to helpencourage and safeguard human capital FSIs(Azfar & Danninger, 2001; Robinson & Zhang,2005), as well as to positively moderate the re-lationship between such investment and firmperformance (Wang et al., 2009).Joint ventures and long-term contracts. The

creation of a joint venture (Kogut, 1988) witha supplier making an FSI provides the supplierwith an explicit ownership stake in the focal in-vestment. Joint venturing reassures the supplierthat the relationship will continue until value iscreated and that the supplier will appropriatevalue commensurate with its equity stake. Thisreassurance is valuable for the supplier becausethe firm can behave opportunistically, such asterminating its relationship with the supplier or


switching to other suppliers (e.g., Kang,Mahoney,& Tan, 2009). Such a solution, of course, also ben-efits the firm in reducing its behavioral un-certainty relative to FSI, as argued in TCE(Williamson, 1985). An alternative approach is tocreate special contract provisions that promotecoordination when appropriation rights are inquestion. Although not extending explicit prop-erty rights to suppliers, this protection similarlyprotects suppliers by reducing the risk of oppor-tunistic behavior (Poppo et al., 2016). While TCEemphasizes the role of control in contractual pro-visions, some evidence suggests that contractsemphasizing coordination (over control) promotecooperative negotiations, even amid opportunis-tic behavior, by facilitating communication andinformation sharing when disputes arise ex post(Lumineau & Henderson, 2012).

Customer property rights. Like other stake-holders, customers also make FSIs under in-complete contracts, in the form of purchases thatrequire expensive search and switching costs(Brush, Dangol, & O’Brien, 2012; Porter, 1980). Inthis scenario customers face considerable be-havioral uncertaintyby the firm, from twosources.First, information asymmetry exists between thefirm and the customer regarding the true qualityor value of the product being sold. The firm mayknow the true quality dimensions of the product,for example, but may exaggerate the quality inmarketing the product. Customers, however, canonly discover the true product quality ex post, af-ter the purchase. This threat reduces customers’willingness to purchase, which can degenerateintowhat Akerlof (1970) described as a “market forlemons,” and this can further decrease customerinvestments. In short, customers face the possi-bility that the firmmay be exaggerating the valueof its products inwhich customersmay bemakinglong-lasting, firm-specific commitments.

Second, customers making such an FSI as pur-chasing a specific software package, which re-quires a large time and learning investment, facethe possibility that the firm may discontinuesupport, updates, or the entire product line. Thissecond problem, in essence, is uncertainty overwhether the firm will unilaterally decide to dropthe customer. Both of these sources of behavioraluncertainty faced by customers have been ac-knowledged in the literature (e.g., Hart & Moore,1996).

The solution for addressing behavioral un-certainty for customers, aswith stakeholders, is to

provide property rights or residual control rightsto FSI-making customers. This governance deviceprovides solutions to both sources of behavioraluncertainty for such customers by reducingthe information asymmetry while increasing theability of customers to control the actions of thefirm. The informational asymmetry surroundingquality is resolved because customers who haveownership in the firm can partially controlinputs in making the products they purchase(Hansmann, 1988). Customers, through their re-sidual control rights, can also encourage policiesthat maximize both the quality they receive andreturns to the firm, as opposed to a situation inwhich the firm simply tries to maximize profits byfocusing on the “marginal consumer rather thanthe average consumer” (Hart & Moore, 1998: 42).3

Additionally, assigning property rights to cus-tomers resolves the issueof a continued long-termrelationship between the firm and customersmaking FSIs, because customers, as share-holders, have a vested interest in voting for suchcontinuity, particularly since in most such gover-nance arrangements, such as cooperatives,shares are nontransferable and so customers andfirms are tied (Ferrier & Porter, 1991). Whileassigning property rights to customers may seemrare, this practice is relatively common in partic-ular industries, including agricultural markets(e.g., farmers’ co-ops), retail customer coop-eratives (e.g., REI), mutual insurance companies(e.g., USAA, Amica, Northwestern Mutual, TIAA),and consumer banking (i.e., credit unions). Theseproperty rights allocation devices targeting em-ployees, suppliers, or customers reduce ex antebehavioral uncertainty and foster greater FSIincentive.

Proposition 1: The provision of propertyrights allocation devices to employee,supplier, and customer stakeholdersdecreases the hazard associated withex ante behavioral uncertainty.

Conflicting effects. The devices outlined abovereduce behavioral uncertainty by imposing costson the firm if it behaves opportunistically, but

3 In a firm owned by outside owners seeking to maximizefirmprofits, its quality-price trade-offwill bemadeon thebasisof attracting the marginal consumer who is not currentlya customer of the firm, whereas existing customers in a cus-tomer-owned firm may focus more on providing quality forexisting customers.


their effect on stakeholders’ exposure to ex anteenvironmental uncertainty is less obvious. Suchex ante devices may increase stakeholders’ ex-posure to environmental uncertainty because thisownership increases their risk bearing, thus cre-ating a counterbalancing effect on stakeholders’willingness to make FSIs. For instance, as em-ployees are compensated with more equity own-ership, their compensation becomesmore subjectto market fluctuations often associated withenvironmental changes. This phenomenon issimilar to that observed with executive stockcompensation (Miller, Wiseman, & Gomez-Mejia,2002), whereby greater stock compensation in-creases the risk bearing of the executive and,thus, creates a disincentive to take greater firmrisk. For example, in IPOs where environmentaluncertainty exists, managers prefer greater fixedcompensation as opposed to firm equity (Beatty &Zajac, 1994). Consequently, employee FSIs maydepend on the degree to which the firm sub-stitutes fixed wage compensation for equitycompensation (Blasi, Freeman, & Kruse, 2016).Similarly, profit-sharing plans have the conse-quence of tying part of the compensation to envi-ronmental shocks (Azfar & Danninger, 2001: 620).From the firm’s perspective, such arrangementsare beneficial in maintaining flexibility in theface of “sticky” wages (wages that do not changemuch in the face of volatility), but this increasedfirm flexibility exposes employees to increasedenvironmental uncertainty.

Similar arguments apply to the firm’s suppliers.Although joint ventures and long-term contractspromote cooperation between the firm and itssuppliers by reducing behavioral uncertainty,they also increase the supplier’s exposure to un-foreseen changes in the environment that reduceor eliminate the value being created by the FSI,such as sudden demand shocks or technologicaldevelopments. The supplier’s equity stake in thefocal joint venture cannot be easily traded in thesecondarymarket. Thus, the risk-sharing functionof joint ventures that reduces behavioral un-certainty related to FSIs also increases the sup-plier’s exposure to environmental uncertainty.Similarly, long-term contracts tie a supplier toa firm’s income stream, exposing it to similar id-iosyncratic risk. Although long-term contractsgenerally include decision rules to account forunforeseen environmental changes, such com-plexdecision rulesmayserveasadisincentive fora supplier to enter into such contracts because

they could signal a high risk of environmentaluncertainty (Jap & Ganesan, 2000) and are costlyto negotiate. Although not as problematic as jointventures, long-term contracts nonetheless mayincrease exposure to environmental uncertainty.Assigning property rights to customers simi-

larly increases their exposure to environmentaluncertainty and may reduce their willingness tomake FSIs. The reasons for this reluctance couldbe twofold. First, being owners in the firm thattheypatronize, customersarenowalso exposed tomarket shocks affecting the firm, because“investing in a firm that one also patronizes canitself increase risk . . . [since] the returns are likelyto be highly correlated” (Hansmann, 1988: 289). Incontrast with outside owners who can easily selltheir stock, customer-owned firms typically re-strict their ability to sell stock (Ferrier & Porter,1991; Porter & Scully, 1987). Thus, the partial ver-tical integration between customer and firm pre-cludes the possibility that customers will sellthe firm’s stock and increases their exposure tofirm-specific environmental uncertainty. Finally,customer-owned firms may be unable to achieveeconomies of scale because participation is re-stricted to a smaller pool of both users and owners(e.g., USAA allows only current or past militarypersonnel to join their insurance pool), potentiallymaking the firm more susceptible to unexpectednegative environmental shocks (Ferrier & Porter,1991; Porter & Scully, 1987).Thus, foremployees, suppliers,andcustomers, the

allocation of property rights has conflicting effectson incentives to make FSIs. While it reduces behav-ioral uncertainty, it may also increase the stake-holder’s exposure to environmental uncertainty.

Proposition 2: The provision of propertyrights allocation devices to employee,supplier, and customer stakeholdersincreases the hazard associatedwith exante environmental uncertainty.

Ex Ante Resource Depreciation Devices

The property rights allocation devices dis-cussed thus far generally are intended to reducestakeholders’ behavioral uncertainty; however,they largely also have the opposite effect of in-creasing stakeholders’ exposure to environmen-tal uncertainty. Such exposure, which maynegatively affect the value of the underlying firmasset and create an unforeseen loss of value,


remains not only unresolved but also may be ag-gravated when the firm relies only on ex anteproperty rights allocation devices. Additional exante devices are therefore needed to specificallyreduce exposure to environmental uncertainty, orthe uncertainty surrounding the value to becreated.

Several protection devices have been proposedin the literature that serve to buffer the firmagainst environmental uncertainty. The most sa-lient include diversification (Wang & Barney,2006), cost-plus contracting (Lusch & Brown,1996), and takeover protection (Wang, Zhao, &He, 2016). These devices share a common mech-anism to increase stakeholders’ willingness tomake FSIs: they buffer the firm against environ-mental uncertainty, reducing the threat of re-source depreciation. As with ex ante propertyrights allocation devices, these ex ante resourcedepreciation devices may be insufficient to uni-laterally incentivize FSIs because of their con-flicting effects on behavioral uncertainty.Additionally, while ex ante property rights allo-cation devices generally apply to individualstakeholder groups (since they need to assignsuch rights to a particular stakeholder), resourcedepreciation devices generally (with the excep-tion of cost-plus contracts) work for multiplestakeholder groups, since they buffer against ex-ternal environmental uncertainty for the wholefirm.

Diversification. Diversification is a protectiondevice that can reduce stakeholders’ exposure toFSI environmental uncertainty. Shareholdersmay oppose diversification because they cansufficiently reduce their exposure to idiosyncraticrisk by holding a diversified equity portfolio. Asa result, finance scholars have demonstrated thatshareholders discount excessive diversification(e.g., Lang & Stulz, 1994), although this conclusionis not without critique (Miller, 2006; Villalonga,2004). More recent research suggests that di-versification needs to be evaluated on a firm-by-firm basis to determine its value-creating nature.Mackey, Barney, and Dotson (2017) demonstratedthat there is no universal “diversification dis-count”; rather, firms canbe rational in their choiceto diversify while maximizing firm value. There-fore, the rational decision to diversify may havebenefits for the firm in terms of value created inidiosyncratic situations. One rational motivationfor diversification is to reduce stakeholder expo-sure to environmental uncertainty and, thus,

incentivize FSIs (Wang & Barney, 2006); in theabsence of such protection, FSIs by relevantstakeholders may decrease (Wang et al., 2003).4

Diversification may reduce stakeholders’ ex-posure to FSI environmental uncertainty intwo ways. First, particularly for employees, di-versification can reduce employment risk bycreating internal labor markets in the firm (di-versified units) that are not subject to the sameindustry environment. These internal marketsallow employees to retain some value from theirFSIs by moving horizontally and transferringtheir FSI knowledge within the firm (to alternateand related business units) if the original projectloses value because of industry-specific idio-syncratic conditions (Tate & Yang, 2015; Wang &Barney, 2006). Thus, even if the external envi-ronment changes in unforeseeable ways, em-ployees’FSIs arepartially protected if their valueis unexpectedly reduced in one setting byallowing them to transfer some of the value in-ternally within the firm. For example, an em-ployee might make firm-specific knowledgeinvestments in a unique enterprise resourceplanning (ERP) software customized for the firm’sown use. If the firm is a single-product firm, anunforeseen environmental change may renderthe single product obsolete, threatening thefirm’s survival and the employee’s ability tocapture value from the FSI. In contrast, if the firmdiversifies into multiple products, industries, orgeographies, the same unforeseen environmen-tal change would render the same product ob-solete, but itmaynot affect others. In this case theemployee’s FSI is protected because the knowl-edge is transferrable across firm divisions.Second, diversification can reduce the volatility

of the firm’s income streams, thereby reducinguncertainty over its future value or projects. Thisis particularly important because volatility inthe firm’s financial performance may discouragestakeholders (including employees, suppliers,and customers) from making FSIs (Bromiley,Miller, & Rau, 2001; Cornell & Shapiro, 1987). For

4 Diversification has long been recognized in economics asan important organizational form for reducing exposure toenvironmental uncertainty when parties are tied to in-vestments. For example, McCloskey (1976) described the or-ganization of a medieval British village in which farmersdiversified their strips of farmland both in crop type and lo-cation to reduce exposure to the natural environment, in-creasing survival even though total production may havebeen reduced.


example, Alvarez & Marsal, a professionalservice firm whose founding business focusedon restructuring firms in financial distress, hasdiversified into several additional servicebusinesses. Corporate restructuring per se maybe highly volatile for firms like Alvarez & Mar-sal, because their business grows rapidly andunexpectedly during recessions and dwindlesin periods of economic boom. Being focusedon a single service—for example, corporaterestructuring—could lead to highly volatile andunpredictable income streams for such firms andcould reduce employee willingness to make FSIs.This has led Alvarez & Marsal to diversify intorelated businesses, such as performance im-provement consulting and private equity funding(Chekler, 2015). Given its service diversificationstrategy, the firm can shift human capital amongthese areas. For instance, in the recent energymarket downturn, the firm’s restructuring busi-ness has seen accelerating income, while itsmanagement consulting arm has been decel-erating. As such, the firm has shifted humancapital among projects in the service businessesand, thus, has maintained employment levels.From an employee’s perspective, the firm’s di-versified service portfolio reduces the risk of jobloss owing to market conditions that reduce de-mand for their current line of work. As a result, theemployee’s exposure to exogenous environmen-tal uncertainty is reduced and the employee ismore willing to make FSIs.

As with employees who may be more willing tomake FSIs as a firm’s income stream diversifiesbeyond one particular industry or productmarket,suppliers and customers also may become morewilling to supply firm-specific equipment ormakefirm-specific purchases when they have strongerassurance that the firm is less susceptible to un-foreseen value depreciation (e.g., Dou, Hope, &Thomas, 2013). For example, a supplier may bereluctant to invest in a firm-specific ERP system(as opposed to a generic software system) thatlinks its operations with that of the focal firm, ifthe focal firm’s financial well-being depends ona single product market or industry. Unforesee-able downturns could bankrupt the firm, leadingto value loss of the supplier’s investment anda cessation of the relationship. In contrast, if thefocal firm’s financial well-being can be smoothedby diversifying into other product markets or in-dustries, the supplier may be more willing tomake FSIs because the focal firm is less exposed

to idiosyncratic industry or product marketshocks.A similar logic applies to customers. In keeping

with the ERP example, suppose the focal firmproduces ERP software and attempts to sellthe software to another firm. The seller that ismore financially stable, robust, and immune tounforeseen environmental shocks will be morelikely to maintain product support and will bemore likely to beperceivedasa reliable long-termsupplier for the customer. Overall, boards of di-rectors, recognizing the value of stakeholder FSIs(Blair & Stout, 2001; Wang & Barney, 2006), mayallow more diversification than might be desir-able for shareholdersalone, in order to incentivizevalue-creating stakeholder FSIs by smoothing thefirm’s future value and income streams.Cost-plus contracting. A similar resource de-

preciation device aimed specifically at suppliersexists in cost-plus contracting, where the focalfirm agrees to compensate the supplier at a fixedpercentage above its costs. This approach re-duces exposure to environmental uncertainty forsuppliers considering an FSI. While the suppliermay not know all the unforeseeable environ-mental changes and associated costs, once it de-cides to make an FSI, it is assured that its costs,within limits, will be recouped (Jap & Ganesan,2000).In essence, the cost-plus contract shifts the ex-

posure to environmental uncertainty from thesupplier to the firm (Arrow, 1962); hence, the firmmust bewillingandable tobear the excess riskbylargely absorbing the unforeseen costs associ-ated with the supplier’s FSI. Increasing supplierincentives in making an FSI through this ex antecontracting device is popular in settings wherea supplier is required to make extensive firm-specific R&D. Examples include automobilemanufacturing (Klein, Crawford, & Alchian, 1978),construction (Bajeri & Tadelis, 2001), and militaryprojects (Arrow, 1962; Laffont & Tirole, 1993). In allof these industries, suppliers’ FSI is required,since projects are often highly firm specific andidiosyncratic.Takeover protection. One source of environ-

mental uncertainty is the market for corporatecontrol. Duringchallengingeconomicperiods, thethreat of a takeover is heightened for a firm.Whilesome empirical evidence suggests that takeoverprotection is used as a tool to promotemanagerialjob security at the expense of shareholders(Mahoney & Mahoney, 1993), there is reason to


believe that firms may benefit from takeoverprotection (Chemmanur, Paeglis, & Simonyan,2011).

A corporate takeover often involves aggressivecost cutting by incomingmanagement and can bea substantial source of uncertainty for stake-holders regarding appropriation value from theirFSI (Wang et al., 2016). For instance, the threatof takeover jeopardizes the ongoing viability ofexisting projects as they are reevaluated and po-tentially cancelled by the incomingmanagement,even after employees make their FSI (Agrawal &Knoeber, 1998). The possible threat of a futuretakeover can also alter the risk profiles of man-agers, making them more short-term orientedand, thus, reducing the quality of long-term in-vestment decisions (Kacperczyk, 2009). Conse-quently, without ex ante takeover protection inplace, investments with short-term returns arepreferred over investments in long-term projectssuch as internal R&D, which requires greater hu-man capital FSI. Thus, the uncertainty surround-ing the threat of takeover may have detrimentaleffects on a stakeholder’s willingness to make anFSI. For employees, this exposure to uncertaintymay reduce FSIs because of postmerger in-tegration, in which employees can be severelyhurt by aggressive layoffs compared to ex-pected long-term relationships (O’Shaughnessy&Flanagan, 1998). Additionally, during takeovers,contracts between the firmandemployeesmaybeviolated, such as a reversion of employee pensionplans (Pontiff, Shleifer, & Weisbach, 1990). If thefocal firm is taken over and an employee is laidoff, the full or partial value of that employee’s FSImay be lost. Therefore, the provision of antitake-over devices may help foster a more long-termorientation in the firm by shielding it from exter-nal market pressures (Chemmanur et al., 2011).

Suppliers face similar challenges under thethreat of takeover. Firms that are taken over, es-pecially through hostile means, are also likely tostrain relations with their suppliers, especiallylong-term ones, in their tendencies to drive downcosts (Shleifer & Summers, 1988). As noted by Feeand Thomas, “Those suppliers that are termi-nated subsequent to a customer merger experi-ence negative and significant abnormal returnsat the merger announcement and significantcash-flow deterioration post-merger” (2004: 425).Thus, takeover protections may overcome thisthreat and increase suppliers’ willingness tomake FSIs.

Customers may also be hurt in the absence ofsuch a protection device. If the focal firm is ag-gressively takenoverbya rival, thenewlymergedfirm may have greater monopoly power to in-crease prices at customers’ expense (Stigler,1964). Takeovers also disrupt the firm’s efforts tobuild and maintain long-term relationships withcustomers who expect consistency in productsand services (Cremers, Nair, & Peyer, 2008). Forinstance, when the firm relies on large purchasesfrom a few customers, significant product cus-tomization is often involved that requires knowl-edge transfer and FSI from these customers. Thethreat of takeover disrupts this sensitive re-lationship by jeopardizing customers’ confidencein the firm’s ability to consistently deliver prod-ucts, services, or maintenance (Cen, Dasgupta, &Sen, 2015). Takeover protections reduce this threatand protect the value of customers’ FSIs. Histori-cal governance differences between the UnitedStates and Japan offer an example: Japan’sweaker markets for corporate control reduce em-ployment risk and increase long-term commit-ment and subsequent FSIs, which might explainJapanese advantages in production and processimprovements (Hoskisson, Yiu, & Kim, 2004).Overall, the resource depreciation devices

previously described are aimed directly at re-ducing exposure to environmental uncertainty forall three key FSI stakeholders. Thus, they serve asan important complementary device to the prop-erty rights allocation devices described in theprevious section, which generally increase ex-posure to environmental uncertainty.

Proposition 3: The provision of ex anteresource depreciation devices to em-ployee, supplier, and customer stake-holders decreases their exposure to thehazard associated with environmentaluncertainty.

Conflicting effects. Although these resourcedepreciation devices are aimed specifically atreducing stakeholder exposure to environmentaluncertainty in making FSIs, they may have theopposite effect of increasing behavioral un-certainty. None of these devices in isolation pro-vides sufficient protection to stakeholders,because, in general,with reducedexposure to onetype of uncertainty, there is increased exposure toanother.Diversification, as argued above, is geared to-

ward reducing exposure to environmental


uncertainty; however, it may also increase be-havioral uncertainty for stakeholders and, thus,does not sufficiently overcome the FSI dilemma inisolation. One explanation is that diversificationincreases the firm’s size, scope, and geographicdispersion. Such changes create internal labormarkets and smooth income volatility, which re-duce stakeholder exposure to environmental un-certainty. However, these same traits alsoincrease the firm’s bargaining power over itsstakeholders in two important ways: monopsonypower and monopoly power. The firm becomesa “price setter” rather than a “price taker” in bothfactor and product markets.

Monopsony is the existence of this condition inlabor markets, whereby the firm has greater bar-gainingpower over its employees (Goux&Maurin,1999; Manning, 2003, 2010), allowing the firm to re-ducewagesunilaterallyas the firm’sgreater scopeand market reach enable it to avoid labor marketcompetition (Wang& Barney, 2006). Diversificationinto new markets also creates greater barriers toentry for new competitors in those markets(Wernerfelt, 1984), which can reduce alternativeemployment opportunities for employees outsidethe firm (Goux&Maurin, 1999;Manning, 2003). Thisdual effect of limited employmentmobility and thefirm’s wage-setting ability increases employees’behavioral uncertainty in the diversified firm. Thefirm is both bigger and has more power, andmanagerial authority over employees increasesaccordingly. Empirical evidence suggests that asthe focal firm expands in scope through verticalintegration, decision making becomes more cen-tralized (Hill & Hoskisson, 1987; Brahm & Tarzijan,2016), which increases stakeholder dependenceon managerial authority.

In addition, diversification imbues the firmwithgreater monopoly power over suppliers and cus-tomers, allowing it to obtainmore favorable termsat stakeholders’ expense. Several reasons existfor this outcome. For instance, as the firm di-versifies, it is less reliant on the supplier, whosebargaining power is therefore diminished (Kogut,1985). In this scenario the mutual hostage situa-tion (inwhich the focal firmand the suppliermakecodependent FSIs; Williamson, 1996) is reducedas the supplier’s investment becomes relativelyless important to the focal firm (Kang et al., 2009).Also, increased industry concentration andincreased firm size through diversificationdecrease the threat of new entrants (Spence,1979; Wernerfelt, 1984) and increase mutual

forbearance with competitors (Gimeno, 1999;Gimeno & Woo, 1996; Montgomery, 1994). Thisdecreasing competition increases the firm’s mo-nopoly power to set prices at the expense of sup-pliers and customers (Stigler, 1964). Hence, bothsuppliers and customers face a smaller set of al-ternatives and a more powerful focal firm, thusincreasing their behavioral uncertainty.Cost-plus contracting also has the counter-

acting effect of increasing suppliers’ behavioraluncertainty. The same effect that reduces sup-pliers’ exposure to environmental uncertaintyworks in reverse on behavioral uncertainty. Byshifting the hazard of unforeseen environmentalchanges from the supplier to the firm, these con-tracts force the firm to increase pressure, moni-toring, and involvement in the supplier’sactivities (Arrow, 1962: 626). Through a cost-pluscontract, the supplier is freed from the conse-quences of unexpected cost shocks and has noincentive to reduce costs or invest efficiently. Inthis scenario information asymmetry exists be-tween the supplier (who knows its costs) and thefocal firm (Laffont & Tirole, 1993). The firm musttherefore attempt to reduce this asymmetry bymore closelymonitoring the supplier’s efforts andretaining a greater ability to enact changes dur-ing the investment process (Bajeri & Tadelis,2001). In short, because the firm agrees to shiftthe risk of environmental uncertainty from thesupplier to itself, it must also negotiate greaterflexibility for intrusion into the supplier’s activi-ties, opening up the supplier to a potentiallymorecapricious firm and thereby increasing its be-havioral uncertainty.Similar arguments can be developed with

regard to takeover protection. Shielding the firmfrom the market for corporate control reducesthe behavioral uncertainty faced by managers,but it increases behavioral uncertainty for thefirm’s key stakeholders. Although takeoverprotection protects the firm’s underlying valueand associated FSIs by shielding it from themarket for corporate control (with accompany-ing short-termism) during periods of volatility,such protection also provides firm managerswith greater authority to act in their own self-interest (Mahoney & Mahoney, 1993; Mahoney,Sundaramurthy, & Mahoney, 1996, 1997). Take-over protection allows managers to be less dis-ciplined and more self-serving, which exposesstakeholders to their whims regarding strategicdecisions. This hazard is salient to employees


because they are directly tied to the firm through-out the value creation process. However, suppliersand customers similarly experience increased be-havioral uncertainty. The increased managerialself-serving behavior made possible by takeoverprotections raises thepossibility thatmanagersactopportunistically against suppliers or customersas they seek to capture greater rents for them-selves. Overall, the resource depreciation devicesof diversification, cost-plus contracting, and take-over protection increasebehavioral uncertainty forstakeholders making FSIs.

Proposition 4: The provision of resourcedepreciation devices to employee, sup-plier, and customer stakeholders in-creases the hazard associated with exante behavioral uncertainty.

Ex Post Moderating Protection Devices

Our theoretical model to this point indicatesthat firms using ex ante protection devices cannotengage in only one type of “solution” to the FSIdilemma because none is individually sufficientto address both sources of stakeholder uncer-tainty. Ex ante property rights allocations helpto reduce stakeholders’ behavioral uncertaintybut generally increaseexposure to environmentaluncertainty. In contrast, ex ante resource de-preciation devices help stakeholders reduce theirexposure to environmental uncertainty but gen-erally increase their exposure to behavioral un-certainty. A trade-off therefore is created whenusing these protection devices: generally, de-creasing one type of uncertainty increases theother. This allows for the possibility that firmsmay create an incentive impasse in attempting tofoster stakeholder FSI. Thus, the question, “Howcan firms overcome this trap?” arises.

In this section we examine ex post devices thatcome into play after the decision to invest hasbeen made. We propose that these devices serveto help firms overcome such a trap by interactingwith the ex ante devices to mitigate the counter-active effects of either type of uncertainty. Hence,we highlight the need for firms to use ex post de-vices, since the ex ante devices themselves areinadequate to resolve this dilemma. We focus onthe following two types of ex post devices pro-posed in the literature: (1) monitoring by thirdparties and (2) relational governance and trust-based relationships.

Monitoring by third parties. Many scholars ar-gue that monitoring by an external third party isa paramount ex post device for incentivizingstakeholders tomakeFSIs (Blair&Stout, 1999, 2001;Rajan & Zingales, 1998). This argument is derivedfrom incompletecontract theory,whichargues thatin cases where two or more parties make FSIs,ownership (control rights) should be given to theFSI-making stakeholderwhose investment ismostcritical (Grossman & Hart, 1986). Rajan andZingales (1998) expanded on this insight by argu-ing that ownership alone is insufficient and caneven disincentivize FSI—first, by giving one partygreater bargaining power over the other and, sec-ond, by allowing the owningparty to sell its sharesand, thus, extract value without needing to investin FSI. Rajan and Zingales (1998) proposed that thesolution is for parties making FSIs to agree to re-linquish ownership rights (and their ability to holdoneanother hostage) to an independent thirdpartynot making FSIs.Blair and Stout (1999, 2001) expanded on this

insight by arguing that the board of directors(BOD) is the legal entity serving this function ina firm. The BOD serves as a neutral body (or“mediating hierarchy”) empowered to “allocatethe resulting production, and mediate disputesamong teammembers over that allocation” (Blair& Stout, 2001: 251). This view is supported by legalprecedent: the BOD has a fiduciary responsibilityto the entire firm, rather than to shareholders only(Clark, 1985), which allows it to act based on eachstakeholder’s contribution to value creation.Thus, in a very real way the BOD’s legal fiduciaryduty is to manage all stakeholders. These eco-nomic and legal arguments represent a clear di-vergence from the principal-agent model ofcorporate governance, where the BOD’s role is toact as a mediating hierarchy to resolve conflictsbetween parties in the firm in order to maximizerealized firm value creation, rather than to simplymaximize shareholder wealth.However, monitoring by a third party, being the

legal obligation of the BOD, is a “second-best so-lution” (Blair & Stout, 1999: 255) and is called uponwhen ex ante devices fail to resolve holdupproblems. As such, monitoring is inherently an expost device (Osterloh & Frey, 2006: 329). The pro-hibitive cost (in time and capital) of monitoringmakes it an impractical solution for day-to-daystakeholder coordination. Thus, monitoring doesnot replace or substitute for ex ante devices but,rather, moderates their effectiveness.


In this section we argue that monitoring servesas an important moderator to ex ante propertyrights allocation devices, which, as describedearlier, may increase stakeholder exposure toenvironmental uncertainty. Because third-partymonitors have as their duty the allocation of re-sources and resolution of disputes over such al-locations (Blair & Stout, 2001), they can serve as animportant moderator to counter the negative ef-fects of property rights allocation devices re-garding environmental uncertainty. The BODmay serve as an ex post resolution device forstakeholders to argue their case to the third-partymonitors over the allocation of the value realizedex post, or the importance of shielding criticalstakeholders making FSI from unforeseen envi-ronmental change. Thus, the BOD functions as aninternal court of law in which stakeholders seekrecourse when ex ante contracts fail and arguetheir case for a favorable judgment.

The effects of a recession on realized stake-holder value from FSI provide an example of howex post third-party monitoring may function asa moderator for ex ante property rights allocationdevices. During a recession, a firm may be temp-ted to terminate a costly R&D project in order toshore up the firm’s short-term performance. Em-ployees with an FSI linked to this project, how-ever, would see the full value of their investmentdestroyed. However, they also will have ex anteproperty rights in the firm, either in the form ofstockownership or other explicit or implicit rights,and therefore the right to appeal to the “mediatinghierarchy” of the BOD. In such a scenario em-ployees might appeal to the BOD to recognize thelong-term value of the R&D project and whycontinuing it may be beneficial, or they mayseek to renegotiate the project time frame orscope. In essence, they may appeal to the BOD,ex post, to shield employeesmaking an FSI fromthe effects of the recession, instead of simplyshielding the shareholders and, by doing so,maximize FSI in the firm, as well as long-termvalue creation.

Thesamemayapply to supplierswhohave jointventures or long-term contracts with the firm,since the firm may be equally tempted, in thisexample of a recession, to terminate such activi-ties in the hope of short-run benefits. Customers,likewise, may face the challenge of having mar-ginal products discontinued or services no longerprovided, despite customer FSI. However, theBOD in these latter two cases may not be as

credible an ex post moderator, since suppliersand customers are external to the firm and maynot have the ability to get the firm’s BOD to heartheir case. However, we next describe conditionsand possible solutions where partial resolutioncould exist for both of these stakeholders.Rajan and Zingales (1998) and Blair and Stout

(1999, 2001) laid out the economic and legal argu-ments for the role of ex post monitors as a devicefor resolving the FSI dilemma. However, severallimitations may be apparent when consideringthe assumptions of the RBV. A central tenet of theRBV is that causal ambiguity, or imperfect ob-servability for both internal and external ob-servers, contributes to sustained competitiveadvantage from FSIs (Barney, 1991). How canthird-party monitors, therefore, achieve impartialor fair ex post allocative decisions under suchassumptions? Are some third-party monitors bet-ter equipped than others for this task? The third-party monitors proposed by Rajan and Zingales(1998: 424) resolve the holdup problem owing totheir “remoteness from the production process” inthat they are third parties without ownershiprights. However, this same remoteness may in-hibit their ability to discern the importance ofshielding stakeholders from environmental un-certainty, as apparent in the previous R&D ex-ample. Evidence suggests that despite their bestintentionsanda legal obligation to be impartial (cf.Blair & Stout, 2006: 737), BODs have considerablediscretion indecisionsandareoftenbiased in favorof shareholders (Thompson, 2016). Even if a BOD isable to carry out its fiduciary duty to representstakeholders fairly (Blair, 2005; Clark, 1985), it maylack the necessary information and incentives tomake optimal decisions that protect stakeholderinvestments (Hansmann & Kraakman, 2001).One possible solution to the apparent pro-

shareholder bias of third-party monitors may beto place stakeholder representatives on the BOD,such as employee representatives (e.g., Kleinet al., 2012; Osterloh & Frey, 2006). However, thiswould violate the assumptions of Rajan andZingales (1998) by placing undue power in thehands of one FSI-making party—what Hansmannand Kraakman (2001) characterized as changingthe BOD from a mediating hierarchy to an “un-mediated coalition” that pursues its own priori-ties to the detriment of other stakeholdersassociated with the firm. In addition, evidencefrom countries where the practice of employeerepresentation on the BOD is common indicates


that such BODs are also biased toward share-holders (Adams, Licht, & Sagiv, 2011). Thus, thereis a tension in the requirements for providinga credible ex post moderating role from the BOD.On the one hand, directors should be impartialjudges that can fairly resolve ex post conflicts. Onthe other hand, directors need to have sufficientknowledge about the firm and its internal ambi-guities and unobservables to resolve such con-flicts. The solution proposed by Klein et al. (2012)and Osterloh and Frey (2006), while important inresolving the “sufficient knowledge” part of theequation, conflicts with the “impartiality” part ofthe equation, since these stakeholder represen-tatives on the BODwould likely be partial towardthe desires of their specific stakeholder group.

One class of monitors, however, may fulfillboth these requirements to a greater extent andprovide a credible ex post monitor within theRBV framework. Specifically, dedicated insti-tutional investors may serve this role by havinga greater ability to evaluate stakeholder FSIcausal ambiguity and nonobservability withinthe firm, relative to “generic” third-party moni-tors, while also not making an FSI themselves.Dedicated institutional investors typically pur-sue a buy-and-hold strategy for the firms theyown (David, O’Brien, Yoshikawa, & Delios, 2010;David, Yoshikawa, Chari, & Rasheed, 2006) andare known as “relational investors” that buildrelational capital with their firms’ stakeholders(Bhagat, Black, & Blair, 2004), which can facili-tate information gathering. This is in contrastwith “transient” institutional owners, who selltheir positions because of short-term marketpressures (Brickley, Lease, & Smith, 1988;Connelly, Tihanyi, Certo, &Hitt, 2010). Dedicatedinstitutional investors are an important andgrowing influence in corporate governance(Aguilera, Desender, Bednar, & Lee, 2015;Connelly, Hoskisson, Tihanyi, & Certo, 2010).

This class of third-party monitors may be pre-ferred under the assumptions of RBV for two im-portant reasons. First, dedicated institutionalinvestors rely more heavily on strategic controlsrather than financial controls in ex post evalua-tion decisions (Connelly, Hoskisson, Tihanyi, &Certo, 2010), thus allowing them a deeper insightinto the value creation process within a firm.Strategic controls imply that such investors do notsimply take into account, ex post, financial in-formation regarding firm or stakeholder perfor-mance; rather, they consider the firm’s broader,

strategic, long-term actions and rationale(Baysinger & Hoskisson, 1990). This provides animportant mechanism in reducing the negativeconsequences of ex ante property rights alloca-tion to stakeholders. If unforeseen environmentalchanges negatively affect the value of stake-holders’ FSI, dedicated institutional investorshave the ability to rationalize ex post the neces-sary stakeholder FSI protection from such un-foreseen change. In the previous example of theR&D project under recession, dedicated in-stitutional investors and their elected BOD mem-bers will have a deeper understanding of thefirm’s strategy and insight into the specific R&Dproject in question, and why its continuation mayenhance long-term value creation (Hoskisson,Hitt, Johnson, & Grossman, 2002). Dedicated in-stitutional investors often have dedicated ana-lysts who study the firm and its industry overa long term. This additional insight may allowthem to make fairer decisions in shielding stake-holders from environmental uncertainty com-pared to other monitors. In essence, dedicatedinstitutional investors may make a firm-specificinvestment in understanding the focal firm’s strat-egy, even if not an FSI in value creation itself.The second reason why dedicated institutional

investors may be the preferred third-party moni-tors in this case is the buy-and-hold strategy theyfollow. By maintaining a long-term equity posi-tion in the firm, they shield the firm from short-term market pressures that may develop in theenvironment. Transient investors, for example,may divest or exit the firm at the sign of an envi-ronmental shock that would negatively affect thefirm’s value or the value of one of its projects. Thisaction would exacerbate the effect of unexpectedenvironmental shocks by depressing the firm’smarket valuation. Dedicated investors, by theirvery nature, would be less likely to undertakesuch an action and, thus, partially shield the firmand its stakeholders from market fluctuations. Byhaving a long-term focus and long-term equitystake in the firm, they have similar incentives asthe firm’s stakeholders and managers. Dedicatedinstitutional investors (and, byextension, theBODmembers they elect) also serve as more credibleex post monitors for external stakeholders, suchas suppliers and customers. They are better ableand more likely to recognize the need to shieldimportant FSI-making suppliers and customers,compared to a generic monitor. In short, third-party monitors, particularly from dedicated


institutional investors, serve as an important expost moderator to ex ante property rights alloca-tion devices by providing a credible ex postdevice to resolve value allocation issues if un-expected environmental shocks occur.

Proposition 5: The provision of ex postmonitoring devices involving BODs anddedicated institutional investors in sup-port of employee, supplier,andcustomerstakeholders will negatively moderatethe effects of the ex ante devices suchthat it will reduce the effect of propertyrights allocation devices on environmen-tal uncertainty.

Relational governance and trust-basedrelationships. A noncontractual device that canbe used to facilitate the ex post renegotiationsprocess is relational governance. In pursuing re-lational governance, the firmand its stakeholdersemploy informal self-enforcing safeguards (e.g.,trust), rather than formal safeguards, such asmonitoring (Dyer & Singh, 1998). Building trustbetween the firm and its stakeholders is an ef-fective device that facilitates bargaining amongparties after contractual conditions are specifiedex ante (Harrison et al., 2010; Poppo et al., 2016).Relational governance, particularly for firmswilling to emphasize stakeholder value creationrather than only shareholder value, can mitigatethe problems created by ex ante contracting withall stakeholder groups. In particular, relationalgovernance and trust can serve to mitigate thebehavioral uncertainty concerns associated withex ante resource depreciation devices.

As previously argued, ex ante resource de-preciation devices serve to shield stakeholdersfrom environmental uncertainty mainly by trans-ferringordiversifying firm risk.However, this alsohas the counteracting effect of increasing stake-holders’ behavioral uncertainty, since the firmhas greater power and bargaining position vis-a-vis the stakeholders. It is obvious that when thefirm is a trusted partner, such trust serves to mit-igate stakeholder behavioral uncertainty. As trustis created through repeated transactions betweenparties, trust and positive relations develop overtime (Barney & Hansen, 1994). Once trust is cre-ated, deviations from it can also be sanctioned(e.g., Fatas, Morales, & Ubeda, 2010). Even if a firmhas higher bargaining power over its stake-holders, trust can serve as an ex postmoderator toreassure stakeholders that the firmwill notuse its

higher bargaining power to extract greater quasi-rents.For example, if a firm builds a reputation as

a fair and caring employer (Barney & Hansen,1994) that does not expropriate value from itsemployees or reduce wages, the monopsonypower problem of diversification may be allevi-ated. Similarly, a firm with a history of not takingadvantage of suppliers alleviates behavioral un-certainty for suppliers (Poppo et al., 2016). A sim-ilar logic holds for cost-plus contracting, whichinduces greater exposure to behavioral un-certainty since the firm reserves greater ability toredefine the terms of the contract to maintainflexibility. Jap and Ganesan (2000), for instance,demonstrated that cost-plus contracts with sup-pliers do not serve to incentivize FSI, unless thefirm emphasizes trust and relational governancedevices. For example, even though a firm mayenjoy greater monopoly power owing to di-versification, and potentially greater propensityto act in a self-serving manner owing to anti-takeover devices, if the firmbuilds a reputationashaving the best interests of its customers at heart,it may signal that it will not unilaterally raisecustomer prices.

Proposition 6: The provision of ex postrelational governance and trust-basedrelationship devices to employee, sup-plier, and customer stakeholders willnegatively moderate the effects of the exante devices such that it will reduce theeffect of resourcedepreciationdevices onbehavioral uncertainty.

In addition to acting as a moderating effect onex ante resource depreciation devices, trust andrelational governancemay also directly affect theimportance of ex ante property rights allocationdevices. Through recursive transactions betweenparties, the firm and relevant stakeholders de-velop trustwitheachotherand learn to internalizevalues and principles that can minimize futureopportunistic behaviors (Barney & Hansen, 1994).They can also serve to reduce the emphasis on exante property rights allocation devices, sincesuch devices need not be all-encompassing orhighly detailed because both parties trust eachother not to expropriate value. Each party maychoose not to behave opportunistically because,according to Barney and Hansen (1994), the costsof opportunismoutweigh the benefits. In addition,as the firm and its stakeholders become more


embedded in their social network through re-peated transactions, violating trust can have so-cial costs, such as lost firm legitimacy (Hill, 1990).For instance, Reuer and Ariño (2007) examinedhow repeated alliance partnerships between twofirms lead to a reduction in ex ante contractualcomplexity, since repeated transactions alleviatebehavioral uncertainty between the two parties.However, such repeated transactions do not re-place and negate the need for ex ante contractsaltogether; they simply serve to lessen their im-portance. A firm contracting with a supplier nolonger needs to create overly complex ex antecontracts; with some trust developed with theparticular supplier (and vice versa), ex ante con-tracts can be more “boilerplate” and open to expost renegotiations, since ex ante behavioral un-certainty for both parties is less severe.

Proposition 7: The provision of ex postrelational governance and trust-basedrelationship devices to employee, sup-plier, and customer stakeholders pro-vides feedback reducing the importanceof ex ante property rights allocation de-vices in reducingbehavioraluncertainty.

DISCUSSION

StakeholdersmakingFSIsareacritical sourceofthe resource-based competitive advantage theo-rized in the RBV. However, FSIs exhibit character-istics that make stakeholders subject to increasedhazardsof firmholdup, firmexpropriation of value,and idiosyncratic environmental risk associatedwith the underlying value of such investments.Thus, stakeholders face both behavioral and en-vironmental uncertainty over their FSIs, which, ifleft unresolved, can be a source of FSI disincen-tive, limiting firms’ability to achieve competitiveadvantage. In this article we seek to extend ourtheoretical understanding of how firms resolveor reduce the dilemma of incentivizing stake-holder FSI.

Various devices to protect stakeholders fromthe hazards associated with FSI have been pro-posed through diverse theoretical lenses, both ina piecemeal fashion and as an undifferentiatedlist. We develop a model incorporating a set ofdevices that can effectively incentivize stake-holders’ FSI, and we examine the conflicts andcomplementarities among these protection de-vices. First, we consider the different sources of

hazards related to FSI for stakeholders: behav-ioral and environmental uncertainty. Second, wegroup the extant set of devices proposed by mul-tiple theories into categories by the manner (exante and ex post) in which they resolve each ofthese sources of hazards. Thus, the frameworkdeveloped in this article highlights importantlimitations to piecemeal solutions or broad-scopestakeholder approaches to this problem, becauseeach set of ex ante devices explicitly targets thehazards primarily related to one type of un-certainty yet produces conflicting effects for theother type of uncertainty. Hence, firms may findthemselves in a trap, where they cannot amelio-rate both uncertainties for stakeholders simulta-neously by relying explicitly on ex ante devices.We then argue that firms must consider an ap-propriate “mix” of devices that work both ex anteand ex post to overcome this potential impasseand address both main hazards faced by stake-holders making FSIs.The framework developed in this article makes

important theoretical contributionsboth to theRBVand to the emerging property rights–based stake-holder theory of strategic management, which isfocused on the importance of stakeholders asa source of firm competitive advantage. First, al-though prior theoretical work stemming from theRBV has highlighted the importance of providingprotection for stakeholders’ value appropriationin FSI (e.g., Wang & Barney, 2006), this articleexpands on the concept by examining the set ofsuch devices in a comprehensive framework.When viewed as a set of potentially contradictoryor complementary devices—property rights allo-cation devices, resource depreciation devices, expost monitoring, and relational governance—aclearer picture emerges of the firm’s challenges inmanaging its stakeholder relationships, whichserve as a foundation for achieving a resource-based competitive advantage.Second, although stakeholder theory grounded

in property rights (incomplete contract) theory haselevated stakeholders’ implicit residual claimantstatus, including both implicit and explicit con-tracts in the nexus that is the firm (Mahoney, 2012;Mahoney & Kor, 2015), and, thus, has broughtstakeholders to the forefront of a firm’s competi-tive advantage, it hasmostly done sowith abroadbrush and does not incorporate how protectiondevices work together in an overall framework.Given RBV’s assumption of causal ambiguity,managing property rights effectively requires


a complementary set of protection devices thatwork both ex ante and ex post of the FSI. Ourframeworkhighlights that itmaybe insufficient oreven counterproductive to focus simply on pro-tecting a stakeholder’s value appropriation as faras FSI is concerned. This is a multifaceted prob-lem as evidenced by themultiple sources of valueappropriation problems (stemming from behav-ioral or environmental uncertainty); therefore, theappropriate mix of devices is more important toconsider in the firm-stakeholder relationship thana general approach to “protecting” stakeholders.

Complementarity and SubstitutionBetween Devices

Our model builds on prior work to demonstratethemultiple complementarities and substitutionsamong the protection devices (e.g., Rediker &Seth, 1995; Seth & Bowden, 1997; Sundaramurthy,1996; Sundaramurthy, Mahoney, & Mahoney,1997). One obvious implication of our deviceframework is that an appropriate and idiosyn-cratic mix of devices may be determined fora particular firm. Drawing on our framework,theoretical and practical implications can bedrawn to determine the gaps in a firm’s protectiondevices or to examine if a firm is relying on toomany devices in an effort to reduce uncertaintiesfor its stakeholders, which could be resolvedthrough less costly means. For example, ex anteproperty rights allocation devices together withex post monitoring by BODs may sufficiently re-duce both behavioral and environmental un-certainty necessary for stakeholder FSI. Asa result, the focal firmwith such deviceswould beengaging in unnecessary and expensive ex anteresource depreciation devices and ex post trust-based relationships. Additionally, firms may findthat developing trust may be more demanding orcostly thansimplyprovidingstakeholderswithanownership stake in the firm, particularly whenenvironmental uncertainty is perceived to be low.

The degree to which a firm will substitute be-tween device alternatives depends partly onwhether behavioral or environmental uncertaintyis more salient to stakeholders. For example, if itis environmental uncertainty, then a more ap-propriate (and less costly) mix of devices may in-volve ex ante resource depreciation devicescombined with ex post relational governance.Stakeholders can also be heterogeneous in theirexposure to each type of uncertainty, which may

create conflict among thegroups.Determining thecosts, the appropriate levels, and the point ofsubstitution and managing potential conflictsmay all be empirical questions. Nonetheless, ourmodel highlights where such opportunities mayexist for efficient use of protection devices to re-duce FSI-related uncertainty and promote valuecreation.

Opportunities for Future Research

Ourmodel suggests that the salience of the twotypes of uncertainties faced by stakeholders de-pends on the context. Behavioral uncertainty canhave greater importance in some contexts, suchas in the presence of weak institutions or weakfirm governance. In contrast, environmental un-certainty is a greater concern for stakeholders inother contexts, such as high-tech industries orindustries subject to frequent shocks (Beatty &Zajac, 1994). As such, studies are needed that ex-amine varying contextual factors and the types ofdevices required.While we have sought to highlight the most

salient protection devices noted in the extant lit-erature, future research could explore other pos-sible devices that may promote FSI. Williamson(1985) proposed unionization (as a hierarchy) tohelp employees making FSIs to bargain collec-tively for better ex ante contracts. Similarly,business group participation may promote sup-plier and customer FSIs (Chang & Hong, 2000).Warranties are an ex ante device that can helpcustomers differentiate product quality by pro-viding a strong signal that a firm will not act op-portunistically by deliberately misrepresentinginformation (Spence, 1977) and will therefore helpto avoid a market breakdown (Akerlof, 1970).Warranties provide the customer with a nearproperty right claim related to the product for theduration of the warranty period. In addition toreducing behavioral uncertainty, warranties areunique in that they also reduce customers’ expo-sure to ex ante environmental uncertainty byserving as a form of insurance against futureproduct failure (Chu & Chintagunta, 2011; Heal,1977). However, warranties may be limited andnot fully backed by the offering firm and, thus,may also affect relational governance.Another setofprotectiondevicesworthyof future

research includes ex ante bonding devices, suchas those pertaining to francise systems. A fran-chisee provides collateral (posts a bond) by


making franchise-specific investments that deterthe franchisee from free-riding or shirking onquality. and thereby debasing the franchise brandname. There is also fear of termination of the con-tract and the loss incurred in loss of such in-vestment. Such ex ante bonding serves to benefitthe whole franchise system (Williamson, 1985).

Finally, future research can enhance our modelby examining the contagion effects amongstakeholders. Protection devices that directly af-fect one stakeholder group may have secondaryeffects on other stakeholders. For example, posi-tive treatment of one stakeholder groupalleviatesuncertainty for another group and leads to in-creased commitment by the observing treatmentof other groups owing to positive reputationspillover effects among stakeholders (Cording,Harrison, Hoskisson, & Karsten, 2014; de Luque,Washburn, Waldman, & House, 2008). As morestakeholder groups make FSIs, these benefitscontinue to increase.

This prediction is consistent with the implicitassumption of instrumental stakeholder theorythat advocates an initialminimal level of attentionto primary stakeholders in order to strengthensubsequent commitments from them as well asother groups.While someprotectionsmay lead thetargeted stakeholders to make FSIs, they can in-directly discourage other stakeholder groups fromdoing so. For example, because of distributionalconflicts among stakeholders (Garcia-Castro &Aguilera, 2015; Lieberman, Garcia-Castro, &Balasubramanian, 2017) some devices generatenegative contagion in that they exacerbatenegative-sum outcomes in which some stake-holders are able to capture a bigger share at theexpense of others, thus reducing FSI. The use ofequityownership for employees candisincentivizeexternal stakeholders from making FSIs byheightening their concerns over unfair internalstakeholder value appropriations; that is, em-ployees experience informational advantagesrelative to external stakeholders, therebyallowingagreater shareof expost valueappropriation (Coff& Lee, 2003). Similarly, top executives can receiveadditional compensation and ownership, whichcancreatepotential tensionwithother stakeholdergroups who become concerned about unfair ap-propriation (Dial & Murphy, 1995). Future researchcan extend our understanding of the interactionbetween stakeholders in our framework.

In conclusion, we hope that our theoreticalmodel will inspire research on this important

topic and will likewise facilitate better practicesleading to more effective stakeholder protectiondevices in facilitating stakeholder FSI and asso-ciated resource-based competitive advantage.Although our focus is on stakeholder appropria-tion protection devices, we believe that, ulti-mately, a system of governance is needed thatfocuses on all stakeholders and does not nar-rowly focus only on shareholder requirements.Such a systemwould more realistically representthe nature of resource-based competitive advan-tage, whereby all stakeholders are representedmore clearly as a firm and its stakeholders co-evolve together (e.g., Kapoor & Lee, 2013).

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Robert E. Hoskisson ([email protected]) holds the George R. Brown Chair ofStrategicManagementatRiceUniversity’s JonesSchoolofBusiness.He receivedhisPh.D.from University of California, Irvine. His research topics include corporate and in-ternational strategy, corporate governance, strategic entrepreneurship, acquisitions anddivestitures, business groups, and IPOs.

EniGambeta ([email protected]) is a doctoral candidate in strategicmanagement atRice University’s Jones School of Business. His research interests include firm-specificinvestment, strategic human capital, and innovation strategy.

ColbyD.Green ([email protected]) isadoctoral candidate instrategicmanagementat Rice University’s Jones School of Business. His research falls within the nonmarketstrategy domain, with a special interest in the outcomes of corporate political activities.

Toby X. Li ([email protected]) is a doctoral candidate in strategic management at RiceUniversity’s Jones School of Business. He studies organizational and partnershiplearning.


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