Ownership and Control in Joint Ventures: Theory and Evidence

Abstract

Joint ventures afford unique opportunities to study how firms assert property rights over jointly used assets because parents clearly delineate control. We argue that ownership allocations trade off investment incentives with control-related inefficiencies. We show how residual control rights can create a discontinuity in parent incentives that explains the observed clustering of ownership at 50-50 and 50-plus-one-share equity allocations. At the same time, the incentive benefits of ownership preserve a rationale for a wide spectrum of asymmetric shareholdings. Analyzing the determinants of ownership in US joint ventures, we find that, consistent with our model, the higher the potential for unilateral value extraction the more parents prefer equal shareholdings regardless of their attributes. Similarly, parent-specific spillovers make 50-50 ownership more attractive to the detriment of one-sided control whereas complementarities in parent resources have the opposite effect.

Keywords: Joint ventures, ownership and control, double-sided moral hazard

JEL Classification: G32, D23, L14