Accounting Quality and Alliance Contract Provisions

Abstract

We show that the number of governance provisions imposed on a firm by a strategic alliance partner decreases with the firm’s accounting quality. This effect is weaker when the firm has greater bargaining power and stronger when the alliance project is riskier. Moreover, the net benefit to an alliance partner of imposing an additional governance provision on its counterparty apparently increases when the counterparty accounting quality is low, resulting in an enhancement of the partner’s market value and a reduction in its bankruptcy risk. Furthermore, alliance partners adopt fewer provisions based on their counterparties’ accounting numbers when the counterparties’ accounting quality is poor.

Keywords: Strategic Alliance Contracts; Accounting Quality; Governance Provisions

JEL Classification: D74, M41