The impact of firm's ownership advantages and economic status of destination country on the wealth effects of international joint ventures

Prior studies provide inconclusive evidence on the wealth effects of international joint ventures (IJVs) on the firm's market value. While some studies document that IJVs benefit shareholders of firms that engage in such activities, others reveal conflicting results. This study provides additional evidence on this issue. On average, shareholders of U.S. multinationals that engage in IJVs benefit from such activities. Specifically, shareholders benefit more from IJVs when their firms possess a higher degree of ownership advantages. This study also finds that higher returns are associated with IJVs with developed countries than with developing countries by U.S. multinationals.     

Asymmetric wealth gains in joint ventures: Theory and evidence

I examine the causes of asymmetric wealth gains (instances where one partner gains and the other partner loses) and the extent of these gains in joint ventures. I argue that asymmetric gains arise as the common benefits created by the venture are offset by the negative wealth effects of resource appropriation for one parent. Using a sample of 412 joint ventures I find that in 42% of the ventures one parent gained and the other lost. In addition, I find that when the abnormal returns of parents within a venture were compared, firms that gained more from forming the venture experienced [−1,0] returns of +3.22% and firms that gained less experienced [−1,0] returns of −1.37%. Additional analyses showed that asymmetric wealth gains tended to occur in ventures where one parent had relatively high valued resources and the other parent had relatively lower valued resources thus suggesting that resource appropriation may be an important cause of this pattern of gains.     

Markups,Tobin's q,and the Increasing Capital Share

Increasing markups have recently gained prominence as a leading explanation for the increasing share of income going to capital since the 1980s. However, the existing analysis has been limited to the United States, covers only short periods, and generally does not control for potentially important confounders. Constructing data for the share of income going to capital and markups based on Tobin's q over the period 1870–2018 for 21 advanced countries, this research examines the ability of markups to explain the movements of income shares and the tendency for factor shares to converge toward constants in the long run. We find strong support for the markup hypothesis.     

Real options,agency conflicts,and optimal capital structure

We examine the impact of a stockholder–bondholder conflict over the timing of the exercise of an investment option on firm value and corporate financial policy. We find that an equity-maximizing firm exercises the option too early relative to a value-maximizing strategy, and we show how this problem can be characterized as one of overinvestment in risky investment projects. Equityholders’ incentive to overinvest significantly decreases firm value and optimal leverage, and significantly increases the credit spread of risky debt. Numerical solutions illustrate how the agency cost of overinvestment and its effect on corporate financial policy vary with firm and project characteristics.     

Dynamic market entry and the value of flexibility in transitional international joint ventures

The purpose of this study is to formalize the optimal choice of market entry strategy for an individual multinational enterprise (MNE) from a dynamic perspective. It is argued that incorporating a suitable treatment of irreversibility, uncertainty and flexibility related to an MNE's investment decision gives further insights into the expansion, dissolvement, and optimal timing of international joint ventures (IJVs). In most cases, the initial entry strategy serves as a platform allowing the firm to make subsequent investments to exploit host-country advantages and capabilities. We allow for this by taking a three-step expansion strategy explicitly into account. The evolutionary process of the value of the foreign direct investment can be interpreted as a compound complex chooser option. The results suggest that uncertainty, size of equity share and future investment/divestment opportunities play an important role when it comes to transit from export to the first phase of the foreign direct investment commitment. The paper underscores the importance of modeling the dynamics of market entry and helps to refine the application of real options in the alliance context by providing a closed-form solution in continuous time to value the overall strategic flexibility.     

Agency hazard,managerial incentives,and the wealth effects of joint venture investments

Grounded in agency theory, this study explores whether the separation of ownership (by shareholders) and control (by managers) in firms is an essential determinant of the valuation effect of joint ventures (JVs). This is achieved by examining the efficacy of incentive alignment mechanisms and their contingency effects. Based on a sample of 963 U.S. firms' JV investments, the results show that poor JV performance is linked to lower levels of executive ownership and reduced equity compensation. The possibility of managers acting for their own self-interest in corporate JV investments is further supported by the stronger positive performance effect of incentive alignment mechanisms documented when firms have a higher level of free cash flow or undertake JVs in unrelated business domains. Both performance measures of short-run announcement effects and long-run stock returns yield similar results. Our results underscore the importance of governing executives' self-interested actions in their JV engagements.     

Interactions of corporate financing and investment decisions: The effects of agency conflicts

We examine interactions between flexible financing and investment decisions in a model with stockholder–bondholder conflicts over investment policy. We find that financial flexibility encourages the choice of short-term debt thereby dramatically reducing the agency costs of under- and overinvestment. However, the reduction in agency costs may not encourage the firm to increase leverage, since the firm's initial debt level choice depends on the type of growth options in its investment opportunity set. The model has a number of testable predictions for the joint choice of leverage and maturity, and how these choices interact with a firm's growth opportunities.     

A Unified Theory of Tobin's q,Corporate Investment,Financing, and Risk Management

We propose a model of dynamic investment, financing, and risk management for financially constrained firms. The model highlights the central importance of the endogenous marginal value of liquidity (cash and credit line) for corporate decisions. Our three main results are: (1) investment depends on the ratio of marginal q to the marginal value of liquidity, and the relation between investment and marginal q changes with the marginal source of funding; (2) optimal external financing and payout are characterized by an endogenous double‐barrier policy for the firm's cash‐capital ratio; and (3) liquidity management and derivatives hedging are complementary risk management tools.     

Investment,agency conflicts,debt maturity,and loan guarantees by negotiation

We consider an irreversible investment, of which the sunk cost is financed by a finite-term debt after entering into an option-for-guarantee swap (OGS) with negotiation. The OGS is a three-party agreement among a lender (bank), an insurer, and a borrower (entrepreneur), where the bank lends at a given interest rate to the entrepreneur and if the borrower defaults on debt, the insurer must pay all the principal and remaining interests to the lender instead of the borrower. In return for the guarantee, the borrower must allocate a perpetual American call option to purchase a fraction (guarantee cost) of his equity at a given strike price. We find that the investment threshold decreases but the exercise threshold of the insurer’s option increases with the borrower’s bargaining power. Both the investment and exercise threshold increase with debt maturity, but there is a U-shaped relation between the guarantee cost and debt maturity. The borrower postpones investment once the funding gap or project risk increases. The swap may overcome the inefficiencies from asset substitution and debt overhang, strongly depending on the debt maturity and borrower’s bargaining power.     

Explaining equity shares in international joint ventures: Combining the influence of asset characteristics,culture and institutional differences

This paper investigates the determinants of the observed contracted equity share ownership structure in international joint ventures (IJVs). We propose that the inherent intangibility of the assets that partner's contribute to the IJV, and both formal (legal) and informal (cultural) institutional differences between partners contribute to explaining the negotiated division of the IJV's equity share. Empirical results from 442 UK-based home-foreign IJVs, indicate that an IJV partner's equity share ownership is positively correlated with the intangibility of the assets they contribute to the IJV relative to those of the second partner. Both cultural and formal institutional differences exert a moderating influence on the observed asset intangibility-equity share relationship for the foreign IJV partner. We attribute this finding to both risk perceptions and the liability of foreignness.     

Measuring performance of Chinese joint ventures

A parent firm has many choices when it comes to selecting the indicators for measuring performance of its international joint ventures (IJVs). This paper identifies the indicators, discusses the reasons and factors that influence these choices. Semi-structured interviews with five US parent firms that have Chinese IJVs reveal that the parents use a range of internal and external indicators but these indicators differ from those they use for the parents themselves. This is due to different cultural and political emphases between the US and Chinese. However, there is no consistency on the weighting on the choices of the indicators, but the respondents reveal a need for a transparent and consistent evaluation process. These findings have implications to the managers of both the parent firms and IJVs, and stakeholders.     

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.     

Divestitures,wealth effects and corporate governance

We analyse the market reaction to divestiture decisions and determine the impact of corporate governance practices. We find the market reaction is significant and can be determined using internal governance mechanisms. We evaluate the determinants of the decision to sell using a control sample of firms displaying characteristics often associated with divestitures indicating that these firms may face the same incentives to divest but elect not to restructure in this manner. Our results suggest that a combination of strong internal and external governance may force managers to act in a manner that is incompatible with their personal desires.     

Analysing the wealth effects of UK divestitures: An examination of domestic and international sales

Here we analyse divestiture announcement effects for UK multinational corporations accounting for the location of the unit sold. We find some bias in market reactions with larger abnormal returns for UK divestitures when compared to overseas sales. US sales generate larger returns than those in Continental Europe or the Asia-Pacific region. We analyse the determinants of abnormal returns using accounting and transaction data, supplemented with country specific data for overseas sales. Abnormal returns for UK sales are explained by financial characteristics of the selling firm but the size of the transaction relative to the firm is the most significant factor in overseas divestitures.     

Information asymmetry and accounting disclosures for joint ventures

In September 1999, the Financial Accounting Foundation issued a special report recommending the use of the equity method supplemented with appropriate disclosures for corporate joint ventures in the United States. This study, using data for corporate joint ventures in Singapore, provides some preliminary evidence regarding the effect of the supplementary information disclosure on information asymmetry among market participants as measured by bid-ask spreads. The results show that the disclosure of supplementary information of joint ventures is associated with a significant decline in bid-ask spreads. The results also indicate that the decline in information asymmetry is larger when the investment in joint ventures is significant and that larger investing firms tend to have a smaller decline in information asymmetry compared to smaller investing firms. The implications of this study, that the provision of supplementary information about joint ventures could reduce information asymmetry among participants in equity markets, thus leveling the playing field among traders, could have implications for policymakers.     

An analysis of the implications of uncertainty and agency problems on the wealth effects to acquirers of private firms

Extensive empirical work shows that bidders do not gain from the acquisition of publicly traded targets but experience positive excess returns in the acquisition of privately held firms. This study investigates how two important differences between private and public firms, namely, informational uncertainty and ownership characteristics, impact the returns to acquirers. A sample of targets that were acquired shortly after filing for an IPO was collected to circumvent the lack of information on private firms. In spite of the special characteristics of these targets, the listing effect is still prevalent in this sample. The results of the analysis are consistent with the hypothesis that acquirers gain in the acquisition of private firms because these targets have a relatively weaker bargaining position due to informational and agency problems and costly access to external capital markets to finance growth opportunities.     

Tobin's Q, Debt Overhang, and Investment

Incorporating debt in a dynamic real options framework, we show that underinvestment stems from truncation of equity's horizon at default. Debt overhang distorts both the level and composition of investment, with underinvestment being more severe for long‐lived assets. An empirical proxy for the shadow price of capital to equity is derived. Use of this proxy yields a structural test for debt overhang and its mitigation through issuance of additional secured debt. Using measurement error‐consistent GMM estimators, we find a statistically significant debt overhang effect regardless of firms' ability to issue additional secured debt.     

Leverage,governance and wealth effects of asset purchasers

We examine a sample of 670 firms that announce asset purchases. We hypothesize that buyer announcement returns should be higher in the presence of better monitoring and better governance. Consistent with the monitoring hypothesis, we find that buyers with higher private debt make purchase decisions that increase shareholder value. Consistent with the governance hypothesis, we find that returns are higher for buyers that have lower antitakeover provisions in place. Consistent with the managerial discretion hypothesis, buyer announcement-period returns increase with buyer leverage. Consistent with the liquidity hypothesis, we find that announcement-period returns decrease with the seller's Z-score, suggesting that buyers benefit from the lower liquidity of assets sold by sellers with lower debt capacity and higher financial distress. We also find that buyer announcement-period returns are directly related to their operating performance in the post-purchase year.