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Agent takeover risk of principal in outsourcing relationships

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  • Alnoor Bhimani
  • Kjell Hausken
  • Mthuli Ncube

Abstract

The provision of outsourcing services creates relationships between knowledge vested with the supplier and the viability of outsourcing arrangements. Knowledge accumulation by the outsourcee can reach a level where it poses a market entry or takeover risk to the outsourcer. Knowledge translates into cash flows interpreted as asset values modelled as geometric Brownian motion accounting for uncertainty, drift, and volatility. We present this argument within a principal-agent theoretical perspective which embeds a real options analysis to represent risk growth. As an alternative to a complicated analysis of the benefits and costs to the agent and principal of a takeover, we propose that takeover of the principal by the agent can be expected if the agent's discounted cash flows is larger than the principal's discounted cash flows. The probability of the takeover of the principal's market by the agent is expressed as an 'optimal stopping time' probability problem.

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Bibliographic Info

Article provided by Inderscience Enterprises Ltd in its journal Global Business and Economics Review.

Volume (Year): 12 (2010)
Issue (Month): 4 ()
Pages: 329-340

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Handle: RePEc:ids:gbusec:v:12:y:2010:i:4:p:329-340

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Web page: http://www.inderscience.com/browse/index.php?journalID=168

Related research

Keywords: principal-agent theory; outsourcing; hostile takeovers; learning; discounted cash flow; revenue; volatility; Brownian motion; Wiener process; market entry risk; takeover risk; real options.;

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  1. Lewellen, Wilbur G & Long, Michael S & McConnell, John J, 1976. "Asset Leasing in Competitive Capital Markets," Journal of Finance, American Finance Association, vol. 31(3), pages 787-98, June.
  2. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  3. Chowdhry, Bhagwan & Nanda, Vikram, 1993. " The Strategic Role of Debt in Takeover Contests," Journal of Finance, American Finance Association, vol. 48(2), pages 731-45, June.
  4. Wouter Dessein & Tano Santos, 2006. "Adaptive Organizations," Journal of Political Economy, University of Chicago Press, vol. 114(5), pages 956-985, October.
  5. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-86, March.
  6. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  7. Jensen, Michael C, 1988. "Takeovers: Their Causes and Consequences," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 21-48, Winter.
  8. Luis Garicano, 2000. "Hierarchies and the Organization of Knowledge in Production," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 874-904, October.
  9. Nielsen, James F. & Melicher, Ronald W., 1973. "A Financial Analysis of Acquisition and Merger Premiums," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 8(02), pages 139-148, March.
  10. Ambrose, Brent W. & Megginson, William L., 1992. "The Role of Asset Structure, Ownership Structure, and Takeover Defenses in Determining Acquisition Likelihood," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(04), pages 575-589, December.
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Cited by:
  1. Silke Friedrich, 2013. "Policy persistence and rent extraction," Public Choice, Springer, vol. 157(1), pages 287-304, October.
  2. Silke Friedrich, 2013. "Policy Persistence and Rent Extraction," CESifo Working Paper Series 4325, CESifo Group Munich.

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