THE USE OF ACQUISITIONS AND JOINT VENTURES BY U.S. BANKS EXPANDING ABROAD

We examine international bank expansions, which are classified as banking (scale related) or nonbanking (complementary) moves into developed or developing markets. The market responds favorably to expansions through joint ventures by U.S. banks, and insignificantly to expansions through acquisitions. Accounting and operating performances (for joint venture banks) and long‐period holding returns (for acquisitions) show improvement in the two years following the announcement. Systematic risk declines for the sample overall, for acquisitions, and for expansions into developing countries. In general, scale or developing expansions are better pursued through acquisitions, whereas complementary or developed expansions are best pursued through joint ventures.     

Risk and wealth effects of U.S. firm joint venture activity

Using a sample of US firms engaged in joint venture activity primarily in the 1990s, we test the hypothesis that joint venture activity is motivated by a desire for efficient risk sharing. We find that approximately ninety-six percent of our sample experiences a risk change in response to joint venture activity. A significant proportion of these experience a reduction in beta. No market price response is evident in conjunction with this reduction. In addition, the average parent firm experiences a significant increase in firm risk, which we attribute to taking on the risky joint venture. This increase in risk is particularly pronounced for firms engaged in international joint ventures and is accompanied by a positive market response. Investment stake, pre-venture firm profitability, size and private risk increasing characteristics appear to influence the wealth character of the joint venture. We interpret that there may be a positive market premium for international diversification effects and/or for the flexibility that the real option joint venture opportunity provides.     

The stock return effect of political risk event on foreign joint ventures: evidence from the Tiananmen Square Incident

This study examines how political risk events affect the value of foreign investing firms. A unique event, the Tiananmen Square Incident, is selected to examine this issue because we believe this incident exacerbated the political risk of doing business in China. We examine the impact of the incident on the stock returns of U.S. firms with joint ventures in China. The results show that this incident indeed had a significant impact on U.S. firms with joint ventures in China, and the market had reacted to this event in an efficient manner. The results also indicate that the impact of this incident on U.S. firms was relatively small in magnitude. Further, the sharp increase of joint ventures after the incident and the significant results in high-risk group vs. the insignificant results in low-risk group provide evidence suggesting that the effect of this incident was temporary rather than long-term and regional rather than national.     

THE VALUE OF EXPERIENTIAL LEARNING BY ORGANIZATIONS: EVIDENCE FROM INTERNATIONAL JOINT VENTURES

We use a sample of international joint venture announcements to test the hypothesis that organizations learn from experience, such that prior learning enhances the value of later ventures. We find that experience with ventures in the same foreign location, as well as experience with international joint ventures in general, is valued by the market. In contrast, experience in the same type of joint venture activity does not add any incremental value. These findings suggest the market recognizes and values some, although not all, forms of organizational learning.     

Evidence on Value Creation in the Financial Services Industries through the Use of Joint Ventures and Strategic Alliances

While an extensive body of literature has examined merger, acquisition, and consolidation activity in commercial banks and other financial services firms, little attention has been paid to examining how these institutions use the cooperative activities of joint ventures and strategic alliances to accomplish their growth objectives. We analyze the effects of the use of joint ventures and strategic alliances by a sample of firms in the banking, investment services, and insurance industries. Our results show that commercial banks, investment services firms, and insurance companies experience significant abnormal returns of 0.66% on average when they announce their participation in a joint venture or strategic alliance. These abnormal returns are significantly positive across the four strategic motives of domestic, international, horizontal, and diversifying cooperative activities. Using a matched sample, we also show that our sample firms enjoy significant, positive, abnormal returns for holding periods of six, 12, and 18 months after the announcement of the cooperative activity.     

The impact of technology-motivated M&A and joint ventures on the value of IT and non-IT firms: a new examination

We extend Lee and Lim (Rev Quant Financ Account 27:111–123, 2006) who provide empirical evidence on the impact of mergers and acquisitions (M&As) and joint ventures on the value of information technology (IT) and non-IT firms. Using technology-motivated transactions, we examine whether there are differences in market response to the announcement of M&As and joint ventures, and we consider the long-term performance of such firms. We find the market provides no (positive) reaction to joint ventures (M&As) at the announcement. We also present new evidence suggesting the market reacts more favorably to the announcement of technology M&As relative to joint ventures for our full sample, IT sample and non-IT sample. However, our examination of these firms’ long-term performance suggests the initial reaction is not fully supported. The findings suggest improved (declining) operating performance for joint venture (M&A) firms, and evidence to conclude joint venture firms achieve superior long-term performance changes for both accrual- and cash-based measures. To explain these inconsistencies, we employ a set of control variables previously documented as determinants of the innovation ownership decision. For joint venture firms, we find that, while the market fails to consider the importance of the firms’ R&D intensity and growth prospects in its initial reaction, these are ultimately key indicators of their future performance. The evidence also suggests the market overreacts to M&A announcements because it over-weights the impact of R&D intensity on the firms’ future performance in its initial response.     

Why Manufacture Offshore? An Empirical Analysis of Valuation Effects

In this study, announcements by U.S. firms of offshore joint venture manufacturing during the 1980s are used to provide more comprehensive evidence than past studies on the wealth effects of offshore joint ventures. Evidence shows that the target country's level of economic development and political stability, currency strength of the originating country (U.S. in this study) relative to that of the target country, U.S. firm's mode of entry, and the relative value of the U.S. firm's investment in the joint venture affect the wealth of U.S. firms which engage in offshore joint ventures. The target country's level of economic development, its political stability, and the currency strength of the originating country relative to the target country are shown to be the dominant economic factors. Of particular importance, evidence indicates that the target country's level of economic development is a more important determinant of excess returns than is its political stability.     

Forward-Looking Tail Risk Exposures at U.S. Bank Holding Companies

This paper develops a simple method for quantifying banks’ exposures to large (negative) shocks in a forward-looking manner. The method is based on estimating banks’ share prices sensitivities to (market) put options and does not require the actual observation of tail risk events. We find that estimated (excess) tail risk exposures for U.S. Bank Holding Companies are negatively correlated with their share price beta, suggesting that banks which appear safer in normal periods are actually more crisis prone than their beta would suggest. We also study the determinants of banks’ tail risk exposures and find that their key drivers are uninsured deposits and non-traditional activities that leave assets on banks’ balance sheets.     

An empirical study of the value-relevance of using proportionate consolidation accounting for investments in joint ventures

This research examines bond risk premiums to determine whether creditors of companies with investments in joint ventures reflect legal or implicit measures of the debts of joint ventures. The legal view suggests that the amount of potential loss from an investment in a joint venture is limited to the investment. The implicit view suggests that the operations of the joint venture and the venturer are interdependent. Equity method accounting reflects the legal view and proportionate consolidation reflects the implicit view.The study examines whether bond risk premiums are more highly associated with accounting numbers from proportionate consolidation than equity method accounting. The study uses data from 10Ks, the Wall Street Journal, and Moody's Bond Record from May 1, 1995 through April 30, 1998. These 4 years are used because US interest rates were fairly stable during this period, which is an important factor when examining bond risk premiums. Additionally, the companies in the study needed to remain stable across the window of study – no mergers, acquisitions, buy-outs, or liquidations – in order to maintain a comparative sample over the entire time period. The risk premium model uses measures of default that change between equity method accounting and proportionate consolidation. Differences in the explanatory power of the model determine how creditors view the joint venture debts.The study shows that approximately half of equity investments represent investments in joint ventures. Furthermore, the average joint venture uses debt to finance about two-thirds of the assets. The results show that proportionate consolidation fails to improve the explanatory power of the model when examining the entire set of companies that invest in joint ventures. However, the data reject the null hypothesis of no improvement with proportionate consolidation when examining companies who guarantee the debt of their joint venture. The policy implication of this study indicates that a change to proportionate consolidation would provide more value-relevant information to creditors when companies guarantee the debt of the joint venture.     

Market reaction to announcements of legislative changes and Canadian bank takeovers of Canadian investment dealers

This study examines the market reactions of Canadian banks and investment dealers to regulatory changes regarding the ownership of investment dealers and to announcements of bank takeovers of investment dealers. The statistically significant and negative abnormal returns for the acquiring banks suggest that any potential benefits from economies of scope in joint bank/brokerage activities were totally reflected in the offering prices banks paid to target investment dealers. Consistent with the literature on mergers, positive and statistically significant excess returns are exhibited by the acquired investment dealers prior to takeover announcements. In-play and out-of-play rival (nontarget) investment dealers exhibit statistically significant positive and no abnormal returns, respectively. The findings of this study are consistent with competition in the market for the corporate control of investment dealers, and not with decreased competition in the brokerage industry. The findings imply that consumers of brokerage services are not harmed by takeovers. These findings may be useful to participants in the U.S. and Japanese financial markets as these countries undergo reforms similar to those recently experienced in Canada.     

THE ROLE OF FINANCIAL RELATIONSHIPS IN THE HISTORY OF AMERICAN CORPORATE FINANCE

The American corporate financing system, unlike that of most other countries, has not been organized around a set of “universal banks” that perform a variety of functions for their clients. Indeed, the distinguishing feature of American financial history is the number and variety of financial intermediaries, and their relationships with corporations (and one another). Besides commercial banks, there are investment banks, insurance companies, venture capitalists, commercial paper dealers, mutual funds, and many others. The economic role of such intermediaries is to reduce market frictions such as “asymmetric information” and “agency problems” that otherwise raise the cost of outside capital for U.S. companies. This article views the changing menu of such intermediaries and their networks as the driving force behind the evolution of American corporate finance. U.S. financial history is seen as a series of institutional and financial innovations designed in large part to work around costly restrictions on relationships–particularly, limits on the scale and scope of U.S. banks–that do not exist in most other countries. In terms of its success in reducing the information and control costs of corporate finance, the history of the American financial system includes periods of significant progress as well as major reversals. Three relatively successful periods– the early 19th-century in New England, the “incipient” universal banking of the 1920s, and modernday financial capitalism–are separated by periods of drastic reductions in the menu of financial relationships– particularly the Great Depression and its 20-year aftermath. Besides new financial claims like preferred stock and new intermediaries such as venture capitalists, another important innovation is new forms of cooperation among intermediaries– especially among banks, venture capitalists, trusts, pensions, and investment banks–that have enabled the U.S. financial system to provide some of the key advantages of universal banking systems. Some of the largest U.S. commercial banks today can be viewed as positioning themselves to play a central coordinating role in these new coalitions of intermediaries. In so doing, they may become the platform for a distinctively American universal banking system.     

VALUE CREATION AT ANHEUSER-BUSCH: A REAL OPTIONS EXAMPLE

The management of Anheuser-Busch created $11.5 billion of shareholder value between 1996 and 1998, a period in which U.S. demand for beer was flat and the company's profits grew only modestly. Of that $11.5 billion, the authors estimate that nearly $10 billion can be attributed to the growth options created or expanded by the company during that period. While divesting itself of unrelated businesses, such as snack foods, Busch stadium, and the St. Louis Cardinals baseball franchise, the company began purchasing minority equity interests in brewing concerns in markets with growing demand for beer, including Mexico, Brazil, Chile, Argentina, and the Philippines.
The main undertaking of the paper is to use the real options valuation method to estimate the growth option value that Anheuser-Busch has created through its investments in joint ventures in foreign markets. The authors focus specifically on a joint venture in the Argentina/Chile market, and argue that this arrangement gives the company the flexibility to invest in a complete brewing and distribution system in that market after learning about the market's potential. In other words, the joint venture creates a call option on the Argentina/Chile market. Traditional DCF analysis, which ignores the flexibility in the strategy, assigns a negative NPV to the joint venture. But explicit recognition of the "option-ality" built into the investment results in a very different valuation—as well as a plausible explanation of the growth option value in the company's stock price.
As the Anheuser-Busch example also illustrates, valuation of the real option depends critically on the assumption about the volatility of the future value of the investment projects. The authors provide an intuitively useful way for managers to examine their own volatility assumptions—one that draws on the probability assessments that are part of the well-known Black-Scholes model.     

The potential for expropriation through joint ventures

We examine the potential expropriation of a firm's intellectual capital that results from joint venture agreements when a firm's joint venture partner becomes the target of an acquisition attempt. We find that: (1) non-targeted joint venture partners often suffer losses in value upon the announcement of the acquisition; (2) the magnitude of the loss increases with the R&D intensity of the non-targeted joint venture partner; and (3) average bidder returns are less negative for acquirers if the affected joint venture partners report R&D spending and are in the same line of business as the acquirer. Our estimate of the average loss is $843 million per firm, roughly 3% of the non-targeted firm's pre-announcement equity value. Our evidence suggests a previously unrecognized merger motive in that joint ventures expose a firm's intellectual capital to the risk of expropriation.     

U.S. banks’ IPOs and political money contributions

This study analyses the effect of political money contributions on U.S. banks’ IPOs. We employ unbalanced panel data of 367 U.S. banks’ IPOs for the period January 1998 to December 2019. Our findings reveal that investors perceive Political Money Contributions (PMC) by U.S. banks as a proxy for political reach and connectedness. We document an inverse relationship between total PMC and the level of underpricing, which implies that both lobbying and PAC expenditure pay off on issue day as donors incur less underpricing. Initial returns decrease with PAC contributions to House of Representatives candidates, whereas the returns relate to the partisan identity of the candidates receiving PAC contributions. We document that those individual contributions by directors bring significant benefits to the IPO banks. Finally, we show that the political contributions of board members, particularly those of CEOs and founders, are associated with better returns in the long term.     

Venture Capital in Canada: Lessons for Building (or Restoring) National Wealth

Canadian policymakers and regulators have been praised for avoiding many of the policy blunders that, when combined with excessive risk-taking by the banks, nearly brought down the U.S. financial sector. But, as the global economy begins to recover, policymakers everywhere need to find ways to stimulate the creation of new ventures.
On that score, Canada's record is not encouraging. The returns on Canadian venture capital investment have been dismally low, particularly in its government-run funds. In a recent survey, 40% of U.S. venture capital partners identified Canada as having the least favorable treatment of investors of any country they had dealings with. And perhaps most troubling, half of the Canadian corporate executives responding to another survey cited "inability to retain talent" as the biggest threat to their firms.
The authors begin by suggesting that these findings are all related. Without investors and the know-how and networks they bring with them, a country's ability to attract, develop, and retain top talent—business and managerial talent in particular—is significantly reduced. And as the authors go on to argue, the key to building a successful venture capital industry is to match talent with capital in such a way that all three parties—talent, capital providers, and the "matchmakers" who bring together talent and capital—are rewarded for superior performance and held accountable for failure.     

The benefits and costs of geographic diversification in banking

We estimate the benefits of geographic diversification within states and across states for bank risk and return for all U.S. bank holding companies from 1994 to 2008, and assess whether such benefits depend on bank size. For small banks, only intrastate diversification increases risk-adjusted returns and reduces default risk while for very large institutions only interstate expansions are beneficial but only in terms of default risk. In all cases the relationship is hump-shaped indicating that at some point, the possible agency costs associated with banks getting wider and more geographically diversified outweigh the benefits. Our results indicate that small banks and very large banks could still benefit from further geographic diversification.     

The Effects of International Joint Ventures on Shareholder Wealth

The purposes of this study are to measure the wealth effects of international joint ventures on the U.S. firms' shareholders and to determine whether these effects are related to the economics status of the partner's home country. The results indicate that overall investor reactions to joint ventures with foreign firms are negative and that only joint ventures with firms from lesser developed countries have nonnegative effects on shareholders' wealth. These findings are in contrast with previous reports of positive stock price reactions to both dimestic and international joint ventures.     

The Use of Interest Rate Derivatives by End-users: The Case of Large Community Banks

This paper investigates the use of interest-rate derivatives by U.S. commercial banks with total assets between $100 million and $1 billion. These banks are interesting, because they allow us to focus on the end-users of interest-rate derivatives rather than dealers. Over our four-year test period, 1990–1993, only 10% of these large community banks, on average about 250 banks per year, used any interest-rate derivatives. We find evidence that the use of interest-rate derivatives is positively related to exposure to interest-rate risk as measured by the absolute value of the 12-month maturity gap. In addition, a community bank's decision to participate in interest-rate contracts is positively related to size. Nevertheless, we find no positive relationship between size and the extent of participation in the derivatives market. Finally, our evidence suggests that banks that participate more heavily in interest-rate swaps have stronger capital positions, an indicator of market or regulatory discipline or both.     

The determinants of U.S. banks’ international activities

This paper develops a model and structural dynamic estimation of bank behavior to map the relationship between U.S. banks’ choices of foreign banking activities, and bank and foreign market traits. This estimation framework is applied to a unique bank-level dataset compiled from regulatory sources, covering U.S. banks’ foreign activities in 83 host markets over the 2003–2013 period. Bank traits are better able to explain the evolving patterns of foreign banking than host market characteristics. After controlling for these traits, the post-financial crisis period shows a structural shift away from cross-border claims towards foreign affiliate activities. Structural estimates of foreign market entry costs and regulatory attitudes towards risk are derived. Simulation exercises confirm the strong impact of banks’ and regulators’ risk stance on bank profits and portfolio composition.     

Procyclicality of U.S. Bank Leverage

In light of the current debate about the link between accounting and financial stability, we investigate the determinants of procyclical book leverage for U.S. commercial and savings banks. We find that total asset growth and GDP growth are both positively related to book leverage growth. Our evidence is not consistent with the notion that fair value accounting contributes to procyclical leverage or that historical cost accounting reduces procyclicality. Overall, the business model of banks is more important for procyclical leverage than accounting or regulatory risk weights.