The Use of Management Controls to Mitigate Risk in Strategic Alliances: Field and Survey Evidence

43 Pages Posted: 19 Nov 2009 Last revised: 3 Aug 2015

See all articles by Shannon W. Anderson

Shannon W. Anderson

University of California, Davis - Graduate School of Management

Margaret H. Christ

University of Georgia - Terry College of Business

Henri C. Dekker

VU University Amsterdam - Department of Accounting

Karen Sedatole

Goizueta Business School

Date Written: September 3, 2013

Abstract

Transaction cost economics (TCE) theory is widely used to study the governance and management control practices used to mitigate interfirm alliance risk. Following Williamson (1985, 1991), empirical studies typically measure transaction characteristics that proxy for risk in alliances (e.g., asset specificity), and test for a relation between these measures and alliance management control choices. A common criticism of studies in this literature is that they typically focus on a narrow set of governance decisions (e.g., make versus buy) or control practices (e.g., specific contract terms). We posit that an equally limiting aspect of this literature is its reliance on risk proxies measured at the level of the individual transaction. These proxies fail to explicate specific alliance risks, and coupled with an undue focus on transactions rather than the totality of interfirm relationships, limit our understanding of how risks give rise to management controls more broadly defined. In this study we use field-based research and survey methods to develop a comprehensive inventory of the specific risks that managers anticipate and to provide insight regarding their prevalence across different types of interfirm alliances. Our analysis of the data supports an extant classification scheme that dichotomizes alliance risk as relational risk or performance risk (Das and Teng 1996, 2001). However, our analysis reveals another distinct risk category: compliance and regulatory risk, that figures prominently in accounting risk frameworks (i.e., COSO). Our exploratory analysis of correlation in the use of management controls, including contracts as well as pre- and post-contractual control processes, reveals six sets of alliance control practices. Relating these to risks, we find that performance risk is associated primarily with careful partner selection and contractual outcome agreements; relational risk is associated primarily with explicit exit agreements; and, compliance and regulatory risk is associated primarily with informal controls. In addition, we find that as compared to contractual alliances, alliances with shared ownership (i.e., joint ventures) make greater use of financial controls and informal controls. By identifying specific risks and controls used in practice and providing preliminary evidence of their relationships, this study provides a reference for future researchers seeking to provide more meaningful insight into the relationship between interfirm alliance risk environment and control systems.

Keywords: Strategic alliances, risk management, field research, survey research

JEL Classification: D23, M40

Suggested Citation

Anderson, Shannon W. and Christ, Margaret H. and Dekker, Henri C. and Sedatole, Karen, The Use of Management Controls to Mitigate Risk in Strategic Alliances: Field and Survey Evidence (September 3, 2013). Journal of Management Accounting Research, Vol. 26, No. 1, 2013. Available at SSRN: https://ssrn.com/abstract=1509461 or http://dx.doi.org/10.2139/ssrn.1509461

Shannon W. Anderson

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States

Margaret H. Christ

University of Georgia - Terry College of Business ( email )

Athens, GA 30602-6254
United States
706-542-3602 (Phone)

Henri C. Dekker (Contact Author)

VU University Amsterdam - Department of Accounting ( email )

Netherlands

Karen Sedatole

Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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