The Wealth Effect of Japanese-US Strategic Alliances
Chang, Shao-Chi, Chen, Sheng-Syan, Lai, Jung-Ho, Financial Management
We investigate the wealth impact for Japanese and US firms that announce nonequity strategic alliances. We find that on average, both Japanese and US shareholders benefit from the formation of international alliances. We also find that shareholders earn larger abnormal returns in these alliances when the partnering firms are relatively small in size, have higher growth opportunities, or are less profitable. We show that both Japanese and US partnering firms display significant improvements in operating performance over the three-year period subsequent to the formation of international alliances.
With the integration of global markets and rapid shifts in technologies, the formation of cross-border interfirm cooperation has become a favored strategy of international expansion (Gulati, 1995). Alliances with foreign partners are an important strategic move that could provide access to outside sources of competitive advantage in the global network (Kogut, 1983; Lummer and McConnell, 1990). For example, The Wall Street Journal (WSJ) reported on August 25, 1998 that Lockheed Martin Corporation and Japan's Mitsubishi Electric Corporation had reached an agreement that provided Mitsubishi with access to Lockheed technology, while helping Lockheed to expand sales in Japan. The two companies would jointly develop electronic missile-control systems and radar devices for ships and planes. Investors responded positively to this agreement. When the agreement was announced, the share prices of both Lockheed and Mitsubishi rose sharply. Clearly, the announcement of an international alliance affected the equity values of the participating firms.
Although alliances with foreign partners take various forms, much of the previous research focuses only on the stock valuation impact of announced international joint ventures (IJVs) that establish separate entities under shared ownership (see, e.g., Lummer and McConnell, 1990; Chen, Hu, and Shieh, 1991; Crutchley, Guo, and Hansen, 1991; Gupta and Misra, 2000). Nevertheless, a significant number of international strategic alliances (ISAs) involve simple agreements with no equity ties, in which the partnering firms do not share equity control or create a new organizational identity. In fact, such nonequity arrangements account for more than 50% of all collaborative arrangements across industries (Zagnoli, 1987; Chan, Kensinger, Keown, and Martin, 1997). In addition, nonequity ISAs provide more organizational flexibility to the partnering firms than do IJVs (Mody, 1993). Nonequity ISAs can form new links with partnering firms or disband quickly in response to changing market demands. This flexible structure facilitates experimentation with new combinations of participants in the development of new products, technologies, or markets. Therefore, nonequity ISAs are particularly valuable to those firms that compete in environments characterized by rapid rates of change in product design and process technologies, with significant risks of failure at the development stage, and rapid obsolescence of products once they enter production (Chart et el., 1997).
In this paper, our objective is to examine the wealth effect of nonequity ISAs on the shareholders of the partnering firms. We also investigate the importance of differences in the characteristics of firms and alliances in determining the valuation consequences across firms. We examine a sample of nonequity ISAs formed between Japanese and US firms over the 1989-1998 period. Focusing on the sample of Japanese-US strategic alliances enables us to investigate the wealth gains for both domestic and foreign partners. This sample also allows us to examine the determinants of value creation without confounding influences from various business environments when ISA partners come from different countries. (1)
Our study is different from Chan et el. (1997), Des, Sen, and Sengupta (1998), and Allen and Phillips (2000), who investigate the wealth effect of domestic strategic alliances (DSAs). …