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Houston researcher looks into why some companies thrive in volatile markets

Firms with real options thrive in uncertain situations because they have the flexibility to change their operations in a way that can amplify the effects of good news and dampen the effects of bad news. Photo via Getty Images

Volatile markets look a lot like high-stakes poker games. Wild swings make it hard to chart a course to profitability, inevitably forcing some firms to fold. At the same time, there are always investors and firms that come out as big winners. So is there is a secret to drawing a winning hand in bad times?

Working with colleagues Evgeny Lyandres of Boston University and Alexei Zhdanov of Pennsylvania State University, Rice Business professor Gustavo Grullon hypothesized that the secret to surviving market volatility has to do with managers' ability to adjust operations. The more flexibility managers have to change the course of their firms, the reasoning went, the greater the likelihood of surviving market volatility, and in some cases taking advantage of it.

Consider Amazon, founded in 1994 with the goal of becoming "the world's most consumer-centric company, where customers can come to find anything they want to buy online." From its start as a bookstore, the company turned into an ultra-diversified behemoth that can shrug off vast swings in the market. Despite high volatility in recent years, Amazon's stock price increased roughly 39 percent, from $1,901 to $2,641, over the past year.

Grullon and his colleagues theorized that having more real options ⁠— managerial choices about tangible assets such as inventory, machinery or buildings ⁠— boosts firm value in a whole range of volatile circumstances, whether demand-based, cost-based or profit-based. Firms that have these options ⁠— Amazon, for example ⁠— can act fast to mitigate bad news by changing operating and investment strategies. They might cut production, shutter operations or delay investments. Companies without these tools basically have to ride fate's rollercoaster.

To test their theory, the researchers compared firms with a plethora of investment opportunities to those with more modest real options. They analyzed returns data from 1963 to 2018 from The Center for Research in Security Prices and from Compustat ⁠— a database of financial, statistical and market information about active and inactive U.S. companies.

Grullon and his team found there was measurable value in having more real options. A bigger spread of real options allowed managers to change strategy as soon as new information arrived. The greater the number of real options, the greater the flexibility managers had at their disposal when the market got volatile.

Developing Amazon-type options and diversified assets, naturally, takes years of sweat, trial and a measure of luck. Companies that do best at creating such opportunities, the researchers note, tend to be highly sensitive to changes in volatility to begin with, leading to more opportunities to adapt. Overall, the team found, volatility-return relation was much stronger in industries already characterized by plenty of growth and strategic options. High-tech firms, pharmaceutical companies and biotech companies, for example, show especially strong resistance to idiosyncratic volatility.

In other words, while volatile markets can resemble high-stakes poker, there are a few predictable rules. When the chips are down, companies that are lucky enough to hold diversified assets, have varied investment options and can shuffle resources quickly will be the strongest players at the table.

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This story originally ran on Rice Business Wisdom. It's based on research by Gustavo Grullon, a professor of finance at Jones Graduate School of Business at Rice University.

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Building Houston

 
 

The HTX TechList is officially launched, and the Houston Exponential team is calling for everyone to register on the site. Screenshot via htxtechlist.com

Houston Exponential has hit launch on the HTX TechList, and now startups, investors, entrepreneurial hubs, and corporations can officially opt into the data-focused and networking-enabled platform.

The HTX TechList went live yesterday, August 13, at a virtual event hosted by HX. (Note: InnovationMap was the media partner for the event.) The platform acts as a one-stop shop for Houston's innovation ecosystem. Mayor Sylvester Turner joined the stream to explain the role the platform will play in connecting the various players within the industry.

"The HTX TechList is our city's leading resource for in-depth information about Houston startups, investors, hubs, and corporations," Mayor Turner said at the event. "Within the Houston region, the HTX TechList will build the connections and density that were never before possible in such a huge spread-out city."

Another benefit to the new platform, as HX Chief of Staff Serafina Lalany says, is the data it is going to be able to provide about the ecosystem.

"We needed a centralized datasource classifying startups, investors, startup development organizations, and corporate innovators," she says on the Houston Innovators Podcast. "There was not any good resource on the internet that was verified, centralized, and adhered to a data standard."

The platform, which has derived from an initiative from Startup Nation Central in Israel, has already proven its usefulness abroad and has over 70,000 monthly users. In a panel at the event, Eran Levy of Enel Innovation Hub Israel described how the tool has benefitted him and his work in scouting startups.

"The ability to have a tool to map, in our case, 8,000 startups, when we look for specific categories or a specific tech area, it helps us a lot," he says. "It saves a lot of time and effort, and, more importantly, it makes it much more effective because I reach out to the right startups."

On the panel, Barbara Burger, president of Chevron Technology Ventures and chair of Houston Exponential, echoed the opportunity for connectivity the platform will enable — but in a specific way for her organization as an investor.

"I view the TechList as the tool that's going to enable a couple of things. One is the scouts to access even more opportunities, but I think the other piece is also for co-investors in startups to be able to find us," she says, adding that while CTV has been around for a couple decades, visibility is always something they'd like to improve on.

Now that the platform is launched, anyone can join to make a profile on the site. Startups, investors, hubs, and corporations can also launch profiles that will be vetted by HX's data team.

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