Essays on corporate strategic alliances
A strategic alliance is a business form in which two or more firms agree to pool their resources to pursue a common objective. We examine some alliances in which firms take a minority equity stake in the partner firm. We refer to these as equity alliances. Using data on 759 alliances, we study whether the use of equity is intended to strengthen the contractual performance of the alliance or whether it is just a means of financing for the capital constrained partner. Consistent with the incomplete contracts theory, equity is more likely to be used when an alliance pairs high growth partners or when the alliance is a technology or R&D alliance. We also find that equity is used when the difference in bargaining powers between the partners is higher. Finally, we find that equity alliances are likely when the smaller partner (which is almost always the selling partner) is high growth but is capital constrained. Consistent with the view that equity mitigates contracting costs and capital constraints, the announcement period abnormal returns are 14.76% for the firm selling equity. Our evidence suggests that the market views equity investments in strategic alliances as more valuable than toeholds taken by potential acquirers where the abnormal gains to the target firms are around 2.2%. We also examine whether a strategic alliance is an organizational innovation that enables a firm to exploit some of the benefits of corporate diversification without facing the costs of being diversified. Since inter-firm transactions are less likely to be fraught with information asymmetry problems, alliances are a useful vehicle to finance growth options without facing the adverse selection cost of external capital. We find that, unlike in the case of acquisitions, the excess values of firms increase after alliance formation. The improvements are confined to cross-industry alliances. The firms entering into cross-industry alliances bring in two important complementary assets - growth opportunities and funds for future investment. This is especially evident when analyzing the likelihood forming a cross-industry alliance. Cross-industry alliances are more likely when there is a larger difference between the partners in R&D intensity and growth opportunities.