Alliances and Corporate Governance
University of Illinois at Chicago
INSEAD - Finance
Michigan State University - Eli Broad Graduate School of Management; Gaidar Institute for Economic Policy; Centre for Economic Policy Research (CEPR); SITE
November 13, 2009
AFA 2011 Denver Meetings Paper
We study the link between a firm’s quality of governance and its alliance activity. We consider alliances as a commitment technology that helps a company CEO overcome agency problems that relate to the inability to ex-ante motivate division managers. We show that well-governed firms are more likely to avail themselves of this technology to anticipate ex-post commitment problems and resolve them. The role of governance is particularly important when the commitment problems are more acute, such as for particularly risky/long-horizon projects (“longshots”) or firms more prone to inefficient internal redistribution of resources (conglomerates), as well as in the absence of alternative disciplining devices (e.g., low product market competition). Governance also mitigates agency issues between alliance partners; dominant alliance partners agree to a more equal split of power with junior partners that are better governed. An “experiment” that induces cross-sectional variation in the cost of the alliance commitment technology provides evidence of a causal link between governance and alliances.
Number of Pages in PDF File: 51
Keywords: alliances, corporate governance, abnormal return and profitability
JEL Classification: G34, G23, G32
Date posted: November 16, 2009 ; Last revised: February 1, 2014
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