Alliance Formation and Firm Value
Management Science, 2018
35 Pages Posted: 23 Jun 2018 Last revised: 26 Jun 2018
Date Written: September 10, 2017
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
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