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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

 
 

As of this week, Lara Cottingham is the chief of staff at Greentown Labs. Photo via LinkedIn

The country's largest climatetech startup incubator has made a strategic new hire.

Lara Cottingham is the new chief of staff for Greentown Labs, a Boston-area company that opened in Houston earlier this year. Cottingham previously served as the city of Houston's chief sustainability officer and the chief of staff for the city's Administration and Regulatory Affairs Department for the past seven years. In her new role, Cottingham will oversee the day-to-day operations and communications for Greentown's CEO Emily Reichert, along with key stakeholder engagements and strategic initiatives for the incubator.

"Lara brings a tremendous wealth of knowledge and experience to our team from her dynamic leadership role at the City of Houston," says Reichert in a news release. "Her breadth of knowledge in sustainability, climate, and the energy transition, and her expertise in regulatory and stakeholder aspects of the energy industry, will be incredibly valuable to our team and community."

Under her leadership at the city of Houston, Cottingham was the chief author of Houston's Climate Action Plan, an initiative aimed at reducing greenhouse gas emissions in Houston, and getting the city to a point where it meets the Paris Agreement goal of carbon neutrality by 2050. Cottingham helped the city move to 100 percent renewable electricity, according to the release, and helped turn a 240-acre landfill into the nation's largest urban solar farm.

"In leading the Climate Action Plan, Lara helped spark Houston's leadership in what has become a global energy transition and was a passionate advocate for climate action in Houston," says Houston Mayor Sylvester Turner in the release. "While she will be missed, this new role will only strengthen our partnership with Greentown. I look forward to working with Emily, Lara, and the Greentown team to meet our climate goals and make Houston the energy capital of the future."

Before her work at the city, Cottingham worked at Hill+Knowlton Strategies' Houston office range of clients across the energy sector. Earlier in her career, she served as communications director for two congressmen in the U.S. House of Representatives. She began her work with the city in 2014.

"In working with Mayor Turner and Climate Mayors across the U.S., I saw how important partnerships are to helping cities decarbonize," says Cottingham in the release. "There is no better partner or place for climate action at work than Greentown Labs. Greentown is 100 percent committed to attracting and nurturing the energy companies of the future and making Houston the energy transition capital of the world. I'm excited to join the team and see how climatetech can help cities reach their climate goals."

Greentown Labs first announced its entrance into the Houston market last summer. The new 40,000-square-foot facility in Midtown across the street from The Ion opened its prototyping and wet lab space, offices, and community gathering areas for about 50 startup companies opened in April. Greentown was founded in 2011 in Somerville, Massachusetts, and has supported more than 400 startups, which have raised more than $1.5 billion in funding.

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