The Value of Adaptability
This paper examines a firm's ability to respond correctly to an unexpected change in the environment (i.e., its adaptability). We develop a model that allows for empirical examination of the impact of a firm's adaptability on its expected profits. The theory shows that a firm's adaptability can be estimated by the squared correlation between an unexpected change and the firm's reaction. The estimates show that adaptability has a large positive impact on the average profit rate and the market value of a firm. We also find that an increase in risk is correlated with a rise in adaptability.
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