Partial Ownership and Strategic Alliances with Reallocation of Corporate Resources

Abstract:     
This paper considers the role of equity transfer to strategic alliance partners in mitigating the moral hazard problem that occurs if a participating firm faces some possibility of reallocating a part of the resources devoted to the joint project of the strategic alliance or retreating from the strategic alliance before completing the joint project. I formally derive a situation in which equity transfer in the strategic alliance is a component of an optimal contract, in particular, in which equity transfer in the strategic alliance is superior to the contract with the cash transfer only. I also analyze optimal equity stake sizes. The results provide new empirical implications for partial stock ownership from the viewpoint of specific investment incentives in strategic alliances under the possibility of the reallocation of corporate resources.

Number of Pages in PDF File: 29

Keywords: cross-shareholdings, equity participation, optimal incentives, partial ownership, strategic alliance

JEL Classification: D82, D86, G32, G34, L14, L24

working papers series