Academic journal article Management International Review

Shareholder Value Creation Via International Joint Ventures: Some Additional Explanations (1)

Academic journal article Management International Review

Shareholder Value Creation Via International Joint Ventures: Some Additional Explanations (1)

Article excerpt

Abstract

* This study highlights four previously unconsidered influences on capital markets' reaction to international joint venture (JV) formation announcements involving American firms. The study combines these `content' and `process' influences on firms' expected JV performance, and tests the four derived hypotheses on a sample of 350 JV formation announcements.

Key Results

* The study's results indicate that abnormal returns increased when: i) JVs were formed to undertake research and/or marketing activities than to undertake manufacturing activities, ii) there was a high level of competition in the American parents' principal industry, iii) both JV partners were firms, and iv) American parent controlled the JV. Apparently, these returns were augmented by the level of business relatedness between the American parent and its JV.

* Abnormal returns were not influenced by: i) American parents' previous JV experience, ii) level of partners' culturally-embedded opportunism, iii) level of political risk in JV host country, and iv) equity structure of the JV. Only the firm size variable had a negative influence on abnormal returns: all else being equal, capital markets expected net benefits of participation in JVs to be lower for the sample's larger firms.

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In a recent survey of empirical studies investigating capital markets' reactions to public announcements of joint venture (JV) formation, Merchant (2000) noted that researchers had usually focused on just five explanations of changes in shareholder value associated with JV formation announcements. Interestingly, the same set of studies identified approximately fifty influences on capital markets' expectations of parents' eventual JV performance. Thus, there is a need to identify additional explanations of shareholder value creation via the JV mechanism. This is a useful endeavor, not only because it fills an important gap in the academic literature, but also because of the strategic significance of joint ventures to practicing corporate managers. Another implication is to consider some previously identified firm-level, as opposed to macro-level, influences over which managers can exert at least some control, even in the short-term. In general, these firm-level influences can be divided into two categories: i) `content' influences, and ii) `process' influences. The former set of influences refers to conditions that facilitate firms' potential for creating competitive advantage, whereas the latter set refers to conditions that facilitate extraction of such advantage. This dichotomy is consistent with principal types of explanations of shareholder value creation in multinational corporations (Morck/Yeung 1991, 1992) and therefore sufficient for the purpose of generating some additional explanations of shareholder value creation arising from firms' JV participation. This study focuses on two influences in each category, and predicts their impact on changes in parents' shareholder value associated with international JV formation announcements. The following section summarizes Merchant's (2000) review of empirical studies investigating the performance implications of firms' JV participation. Next, the study argues the specific role of content and process factors on shareholder value creation via JVs, and generates four hypotheses. The study then describes its research protocol, and reports its empirical findings. The final section discusses these findings and identifies area for future research.

Literature Review

As noted earlier, Merchant (2000) surveyed more than thirty-five event studies of joint venture formation announcements. These studies, in strategic management and finance fields, were conducted over a sixteen year period (1983 through 1999), and comprised joint ventures between American firms as well as between American firms and non-American partners. To the extent these studies represent the domain of existing work on the topic, the interested reader is urged to consult that work to obtain a more detailed view. …

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