The value of adaptability—Through the analysis of a firm's prediction ability

In this paper, we define a firm's adaptability by its ability to correctly predict and, therefore, appropriately adapt to an unexpected change in the environment. Given this definition of 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 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.