Managerial Theory of Firm: Towards a Synthesis of Finance and Strategic Management

Abstract

Modern strategic management explains competitive position of a company through manager’s efforts in searching and constructing firm-specific resources and capabilities. Corporate finance claims that an investor forms a diversified portfolio taking into account systematic risk only (no link to management) whereas firm-specific risk is completely ignored. We have arrived to a paradox, which affirms that company’s value does not depend on manager’s efforts. In essence everything depends on industry (industry beta is a recommended proxy for systematic risk). The survey is devoted to recent progress in solving the paradox. The breakdown is based on consideration of shocks in idiosyncratic cash flows, which leads to a new systematic risk model being grounded on managers’ actions. These shocks are related to exercising of growth options, which are the major tool for adaptation to uncertainty of external environment recommended by strategic management.