William Schmidt, Technology and
Operations Management DBA
Thesis Chair: Ananth Raman
Relationships between Operations and Company Risk
I explore how operational decisions affect both the value of the firm and the level of risk borne by the firm and its investors. This is particularly challenging in the context of the low probability / high impact risks that I study because these risks are difficult to model, occur unexpectedly and with little notice, and have highly variable impact. While it is unsurprising that operational disruptions can have a material effect on company value, this impact can vary considerably and countermeasures to mitigate disruption risks can be costly. Thus, it is important for managers and investors to recognize the types of disruptions and the organizational factors that lead to the worst outcomes.
Managers often face difficult tradeoffs between driving efficiency in their operations and maintaining sufficient flexibility to respond to disruptions. Prior research remains unsettled as to whether improvements to firm operational efficiency aggravate or alleviate the impact of disruptions. Improved operational efficiency may remove critical buffers and leave firms more exposed when a disruption occurs, or it may improve firms' agility and allow them respond more effectively to a disruption. We hypothesize that the impact on firm value depends on whether the disruption is due to factors that are internal versus external to the firm and its supply chain. We use a sample of over 500 disruptions collected from company press releases and find empirical evidence that a higher rate of improvement in operating performance aggravates the impact of internal disruptions but not external disruptions. By taking advantage of an exogenous policy shock regarding corporate disclosure rules, we also find that managers show systematic bias in the disruptions they choose to announce, and we control for this effect in our model specifications. 1
