Strategic Alliances, Equity Stakes, and Entry Deterrence

Abstract:     
I study how strategic alliances and their impact on future competitive incentives can motivate interfirm equity sales. In the model, an alliance between an entrepreneurial firm and an established firm improves efficiency for both. However, the requisite knowledge transfer heightens the established firm's incentive to enter one of its partner's markets. I show that equity can eliminate the entry incentive, but accommodation is sometimes chosen to encourage entrepreneurial effort on future growth options. I analyze stake sizes, block pricing, and stock returns. The results have implications for equity alliances, corporate venture capital, and the organization of research activities.

Number of Pages in PDF File: 50

Keywords: strategic alliances, cooperation, equity stakes, entry deterrence, venture capital

JEL Classification: D43, G32, G34, L13, L14

working papers series