Alliance Formation and Firm Value

35 Pages Posted: 23 Jun 2018 Last revised: 26 Jun 2018

See all articles by Luis M. B. Cabral

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics; Centre for Economic Policy Research (CEPR)

Gonçalo Pacheco-de-Almeida

HEC Paris - Strategy & Business Policy

Date Written: September 10, 2017

Abstract

We consider the formation of alliances that potentially create complementarities, that is, when the value function is super-modular in firm resources. We show that, in a frictionless world where information is perfect and managers optimize, firm alliances disproportionately increase the value of high-resource-level firms, resulting in higher variance and higher skewness of the distribution of firm value; moreover, higher-value alliances are subject to regression to the mean at a faster rate. These effects are magnified if the degree of complementarities is endogenously determined by each firm’s investment. We also consider alliances where matching and/or information about firm resources are imperfect, and show that complementarities are a necessary but not sufficient condition for alliances to cause an increase in firm value; and that complementarities are neither a necessary nor a sufficient condition for alliances to be correlated with higher firm value.

Keywords: Firm Alliances, Matching, Competitive Advantage

JEL Classification: L10, L24, L25, L11, M20

Suggested Citation

Cabral, Luis M. B. and Pacheco-de-Almeida, Gonçalo, Alliance Formation and Firm Value (September 10, 2017). Management Science, 2018; HEC Paris Research Paper No. SPE-2018-1282. Available at SSRN: https://ssrn.com/abstract=3193393

Luis M. B. Cabral (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-998-0858 (Phone)
212-998-4218 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~lcabral

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Gonçalo Pacheco-de-Almeida

HEC Paris - Strategy & Business Policy ( email )

Jouy-en-Josas Cedex, 78351
France
(+33) (0)1 39 67 97 62 (Phone)

HOME PAGE: http://www.hec.edu/Faculty-Research/Faculty-Directory/PACHECO-DE-ALMEIDA-Goncalo

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