The Wealth Effects of Domestic vs International Joint Ventures: The Case of Real Estae

By He, Ling T; F C Neil Myer et al. | The Journal of Real Estate Research, January 1, 1997 | Go to article overview

The Wealth Effects of Domestic vs International Joint Ventures: The Case of Real Estae


He, Ling T, F C Neil Myer, Webb, James R, The Journal of Real Estate Research


Ling T He* F C. Neil Myer** James RI Webb**

Abstract. This study examines the wealth effect of international versus domestic real estate joint ventures on the US. participating firm's shareholders. This is done using traditional event study methodology for real estate joint venture announcements. The results suggest that domestic real estate joint ventures generally result in a significant increase in the firm's value, while international real estate joint ventures usually have a much less significant to nonsignificant wealth impact. This may be due to the immovability of real properties in foreign countries and the large amount of initial investment in real estate that increase both political and economic risks for international real estate joint ventures. This study also finds that hotel joint ventures generally have a weaker wealth effect than non-hotel real estate joint ventures.

Introduction

The joint venture is a widely used method of corporate expansion in general business, as well as in the real estate area. The international joint venture provides U.S. companies with opportunities to access overseas markets. This is especially true in countries that prohibit acquisitions of real estate by foreign investors or have related restrictions for direct foreign investment.

However, despite their importance, joint ventures in general, and international real estate joint ventures in particular, have not been rigorously examined thus far. The purpose of this study is to investigate the impact of both domestic and international real estate joint ventures on the value of U.S. firms, and to analyze the factors that may explain any abnormal returns. To be consistent with the literature, an international real estate joint venture is defined as one in which at least one partner is from a foreign country and the real estate properties involved in the joint venture are located in the foreign country. Because of the immovability of real estate, international real estate joint ventures bear more political and economic risk than the normal foreign direct investment. However, as with foreign investment in general, there may be diversification benefits. Conflicting results about the wealth effects of joint ventures have been previously reported in the literature. Therefore, this study will provide new evidence on this important issue by expanding the joint venture analysis into the international area and by extending the time period of the analysis.

The remainder of this paper is organized as follows. Section two reviews the previous studies on the impacts of domestic general business joint ventures on shareholders' wealth. Section three discusses international general business joint ventures. The fourth section reports on the previous studies about the wealth effect of real estate joint ventures. The fifth section describes the methodology and data used in this study. Section six presents the results, and the final section contains a summary and conclusions.

Domestic Joint Ventures

Joint ventures are the pooling of resources by two or more firms to form a new legal entity. The original management of the parent firms remains intact under a joint venture (McConnell and Nantell, 1985). Darrough and Stoughton (1989) conclude that the two most important features of joint ventures are joint control of resources by investors and synergies based on the strategic exploitation of comparative advantages. Harrigan (1985) presents three basic motives for joint ventures: 1) to augment internal strengths by concentrating resources in areas where the firm is a leader; 2) to enhance the competitive ability of the firm; and 3) to focus on strategic benefits. However, Hennart (1988) argues that the motive for joint ventures is to minimize transaction costs. In the studies of domestic real estate joint ventures, acquisition of capital would seem to be one of the primary motives (Berger and Friedman, 1977). …

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