Myopic Capital Market Concerns and Investment Incentives in Business Alliances

Review of Accounting Studies

49 Pages Posted: 17 Dec 2019 Last revised: 23 Jan 2023

See all articles by Hui Chen

Hui Chen

University of Zurich

Thomas Pfeiffer

University of Vienna - Accounting and Control

Date Written: October 1, 2022

Abstract

We study a publicly traded firm that cares about its stock market performance, while collaborating with a privately owned firm in a business alliance. The firms each undertake a relation-specific investment and then bargain over the allocation of the joint surplus generated by the alliance. The public firm's market concerns affect both the total size of the surplus and how the surplus is divided by the firms. While the public firm always becomes more aggressive and obtains a higher portion of the surplus, the total size of the surplus may become larger or smaller due to the effect of market concerns on the firms' investment incentives. We establish conditions under which the investment and the value of each firm increase or decrease with market concerns. The market concerns could
mitigate or exacerbate the hold-up problem between the two firms and thus could be either beneficial or detrimental for the whole business alliance. We also study two extensions with (i) the two investments being substitutes instead of complements, and (ii) both firms being publicly listed. In both cases, the insights from our main model still hold true.

Keywords: Business alliance, capital market concerns, holdup problem, investment spillover, specific investment, supply chain

JEL Classification: M40, M21, M11, G30

Suggested Citation

Chen, Hui and Pfeiffer, Thomas, Myopic Capital Market Concerns and Investment Incentives in Business Alliances (October 1, 2022). Review of Accounting Studies, Available at SSRN: https://ssrn.com/abstract=3504536 or http://dx.doi.org/10.2139/ssrn.3504536

Hui Chen (Contact Author)

University of Zurich ( email )

Plattenstrasse 14
Zurich, CH-8032
Switzerland

Thomas Pfeiffer

University of Vienna - Accounting and Control ( email )

Oskar-Morgenstern-Platz 1
Vienna 1090, Vienna
Austria
+43-1-4277-38002 (Phone)
+43-1-4277-38004 (Fax)

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