Strategic Alliances and Idiosyncratic Information: Evidence From China

Abstract

This study examines how strategic alliances affect idiosyncratic information. Theory suggests that strategic alliances bring complementary resources and contracting hazards to firms. Accordingly, we conjecture that alliance involvement reduces firms’ incentives to disclose idiosyncratic information due to less capital market benefits of disclosure and possible use of such information by other partners and regulators to monitor the alliance activities. Our empirical results show that strategic alliance involvement is negatively associated with idiosyncratic information, and this relationship is more pronounced when firms enter into more contractual alliances. The results are robust to using the volume-synchronized probability of informed trading and the kurtosis of the return distribution as alternative idiosyncratic information proxies and two-stage instrumental variable regressions. We also find that allied firms have fewer incentives to voluntarily issue performance forecasts, more disclosure similarity to their industry peers, lower future earnings response coefficient, and greater analysts’ forecast dispersion and errors. Evidence from cross-sectional and difference-in-differences tests supports our prediction on the mechanisms through which strategic alliances affect idiosyncratic information.

Keywords: Idiosyncratic Information; Opportunism; Resource Complementarity; Strategic Alliances

JEL Classification: D74; D82; G14; M48