The Control and Performance of Joint Ventures

We analyze the control and performance of assets operating in joint ventures (JVs). Control in JVs is determined by the allocation of voting rights and by the contracts that govern the JVs. This hybrid allocation of control seeks to reduce the potential for ex post opportunism. The results suggest that contractual provisions encourage collaboration and improve JV performance when one of the partners accepts a minority position on the board. The analysis also reveals that with the exception of JVs with contractual option provisions, assets operating in our sample of JVs generate higher returns than assets in fully controlled subsidiaries.     

Why Capital Efficiency Measures Are Rarely Used in Incentive Plans, and How to Change That

Despite the wide acceptance of DCF valuation and its corollary that value is created only by earning more than the cost of capital, very few companies use performance measures that focus on corporate efficiency in using capital—measures such as return on capital (ROC) or economic value added (EVA)—as the main basis for their top management incentive programs. In this article, the authors begin by documenting the surprisingly limited use of such measures in management incentive plans. Next they analyze three often cited problems—difficulty in retaining managers, discouragement of growth investment, and complexity—that could account for the limited use of such measures. Third and last, they suggest a number of adjustments to standard capital efficiency measures that are designed to address these problems and, in so doing, to give corporate directors more confidence in using measures like EVA to reward and hold managers accountable for value-adding performance.
In illustrating the problems encountered when using such performance measures, the article uses case studies of three long-time "EVA companies"—Briggs & Stratton, Herman Miller, and Manitowoc—to highlight the difficulty of using a "bonus bank" (or "clawback") system to hold managers fully accountable for earning a minimum return on capital. After presenting empirical data that shows "delayed productivity" of invested capital, the authors suggest that conventional capital efficiency measures can discourage value-increasing growth.
The article concludes by recommending that although measures like EVA used in combination with negative bonus banks provide the right incentives, EVA capital charges should be phased in gradually to reflect the delayed productivity of capital. At the same time, corporate boards should consider providing bonus bank "relief" when market and industry factors have excessively large negative effects on the performance measures and bonus awards.     

Corporate Combinations and Common Stock Returns: The Case of Joint Ventures

The gain to stockholders from mergers is well documented. However, there is little evidence as to whether the source of the gain is due to synergy or management displacement. Merger is just one of an almost limitless variety of ways in which firms combine resources to accomplish some objective. A joint venture is another. In addition to being of interest as an independent phenomenon, because the original managements of the parent firms remain intact under a joint venture, investigation of wealth gains from joint ventures provides an opportunity to isolate the management displacement hypothesis from the synergy hypothesis as the source of gains in corporate combinations. Our results are 1) there are significant wealth gains from joint ventures, 2) the smaller partner earns a larger excess rate of return while the dollar gains are more equally divided, and 3) the gains, scaled by resources committed, yield “premiums” similar to those in mergers. We are inclined to interpret our results as supportive of the synergy hypothesis as the source of gain from corporate combinations.     

Managing Health Boards: The Difference That Women Could Make

This article looks at women's representation on trust boards and health boards in Scotland. Women are out-numbered by two to one on boards, but there is a more worrying pattern in terms of the type of posts held by women—there are four chairmen of boards for every chairwoman, and chief executives are 14 times more likely to be male. The authors show that this under-representation of women is denying the health service access to a huge reserve of talent and skills.     

The Wealth Effect of Domestic Joint Ventures: Evidence from Taiwan

This study presents important international evidence by examining the wealth effect of domestic joint ventures by Taiwanese firms. In opposite to United States evidence, we find that announcements of domestic joint ventures by Taiwanese firms are, on average, associated with significantly negative abnormal stock returns. We also find that the stock market response to announced domestic joint ventures is significantly positively related to the announcing firms' investment opportunities, size of investment and debt ratio, and is significantly negatively related to the business relatedness variable. In contrast, free cash flow, firm size, relative firm size and managerial ownership are found to have no significant power in explaining the market response. Our results support the investment opportunities, synergy and complementarity hypotheses as well as a broad interpretation of the free cash flow hypothesis, but reject the absolute size, relative size and alignment-of-interests hypotheses. This study makes valuable contributions to the literature by providing the first direct evidence on the role of investment opportunities, synergy and alignment-of-interests in explaining the wealth effect of domestic joint ventures     

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.     

Domestic and International Equity REIT Joint Ventures: Structuring Corporate Options

We examine a sample of 185 Joint Ventures parented by publicly-traded Equity Real Estate Investment Trusts 1994–2001. These transactions are found to be motivated by a wide variety of corporate strategies. Shareholder returns for REIT parents are significantly positive, which is consistent with wealth effects previously reported for joint ventures formed by non-REIT real estate firms. In a subsample of joint ventures formed to structure partial dispositions of property, however, abnormal returns are significantly negative, which is consistent with the free cash flow theory of Jensen. REIT joint venture experience in Asia has been neutral for value, but may improve in the future if early ventures have created options for more efficient partnerships later.     

The Role of Knowhow Acquisition in the Formation and Duration of Joint Ventures

We analyze the role of knowhow acquisition in the formationand duration of joint ventures. Two parties become partnersin a joint venture to benefit from each other’s knowhow.Joint operations provide each party with the opportunity toacquire part of its partner’s knowhow. A party’sincreased knowhow provides the impetus for the dissolution ofthe joint venture. We characterize the conditions under whichdissolution takes place, identify the party that buys out itspartner, determine the time to dissolution, establish its comparativestatics, and examine the implications of knowledge acquisitionfor the desirability of joint venture formation. (JEL code:G34)     

Controlling International Joint Ventures: An Investigation of Australian Parent Partners

International joint ventures (IJVs) are an important modern organisational form, with their complexity presenting significant management and control issues. Our research uses a cross-sectional survey of Australian parent partners of IJVs to provide insights into the characteristics of Australian companies and their IJVs, performance outcomes and choices of parent partners management control systems (MCS) design in terms of operational areas they seek to control (focus), the extent to which they exercise control (extent) and the mechanisms of control used (formal and informal). Australian parent partners of IJVs generally are, partnering in countries close to Australia in the Asia-Pacific, in activities similar to those they undertake in Australia, contributing a significant amount of resources, but overall have only limited IJV experience. Australian parent partners focus on a limited set of controls, often with tighter formalised control structures. Finally, overall they are satisfied with the performance of their IJVs, with higher satisfaction for organisational learning and product/customer dimensions than financial performance.     

The Evidence on Product-Market Diversifying Acquisitions and Joint Ventures by U.S. Banks

We examine the acquisition and joint venture strategies of U.S. banks from 1980 to 1998 to diversify into non-banking sectors. We find that the market responds favorably to both types of expansions, with the gains being shared between acquiring banks and their targets and venture banks and their non-bank partners, respectively. Acquisitions expose acquiring banks to significant increases in nonsystematic, market, and total risk, while joint ventures result in significant decreases in the nonsystematic and total risk measures for participating banks. Our results suggest that product-market expansions, in general, provide U.S. banks with value-enhancing opportunities, and that joint ventures may improve both the return and risk characteristics of the partner banks.     

How Preussag Became TUI: A Clinical Study of Institutional Blockholders and Restructuring in Europe

Between 1997 and 2004, Preussag, a diversified German conglomerate of "old economy" businesses, transformed itself into TUI, a company focused almost entirely on tourism and logistics. We analyze how Preussag executed this change, and how the change contributed to Preussag's underperformance in the stock market. We find that only the divestitures created value, that the strategy to invest in tourism destroyed value, and that the acquisition premiums Preussag paid were mostly unjustified. The case shows how divestiture programs increase the liquid resources available to management and casts doubt on the positive governance role of institutional blockholders.     

Management and the Professions: How Cracked is That Glass Ceiling?

All prestigious or highly-paid occupations in Britain are dominated by men: this is as true of the public sector as it is of industry. This article examines the evidence for discrimination in the public sector. It deals with both the situation at work and the one at home. It looks at various explanations as to why this is the case, as well as the evidence on how men and women deal with the inequality. The author concludes that there are good reasons why men and women do not see or confront the issues discussed in her article. Unless men and women wake up to the fact that we live in an unequal society and wish to see the glass ceiling well and truly broken, little is likely to change.     

Accounting for Joint Ventures and Associates in Canada, UK, and US: Do US Rules Hide Information?

Abstract:   Unlike US GAAP, accounting principles in Canada and the UK require disclosure of disaggregated components of joint ventures and associates. Using comparative analysis of Canadian, UK and US data, this study investigates the potential loss of forecasting and valuation relevant information from aggregating joint venture and associate accounting amounts. Findings show that aggregating joint venture and associate investment numbers, and aggregating joint venture revenues and expenses, each leads to loss of forecasting and valuation relevant information. Thus, current US accounting principles likely mask information that financial statement users could use to predict future earnings and explain share prices.     

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.     

Why Do REIT Prices Change? The Information Content of Barron's “The Ground Floor”

This article examines the information content in a series of market commentaries covering the publicly traded real estate market. The data are constructed from REIT-specific announcements published in a widely disseminated source of market commentary. The empirical methodology is designed to test whether the unexpected price change and unexpected volume are significant on the announcement day. The results demonstrate that the market commentaries provide information that impacts prices and that investors use this information in their trading. Additional analysis suggests that prices change more in the period following the REIT boom than during an earlier period. This result seems somewhat puzzling given recent studies that report an increase in REIT market liquidity.     

Formal Water Markets: Why, When, and How to Introduce Tradable Water Rights

In most countries the state owns the water resources and thehydraulic infrastructure, and public officials decide who getsthe water, how it is to be used, and how much will be chargedfor it. But costly inefficiencies in the supply and use of watersupport a shift from government provision to a market-basedapproach that is more effective and less wasteful. Markets can allow rapid changes in allocation in response tochanging demands for water and can stimulate investment andemployment as investors are assured of access to secure suppliesof water. Because of water's unique characteristics, such marketsdo not work everywhere; nor do they resolve all water-relatedissues. By designing appropriate water laws and regulationsand by strengthening private and public institutions to administerthem, formal water markets can effectively address rising demandsfor groundwater and for water found in rivers, lakes, and canals.Lessons from Chile's experience demonstrate that formal watermarkets can improve the economic efficiency of water use andstimulate investment.      

DotCom Mania: The Rise and Fall of Internet Stock Prices

This paper explores a model based on agents with heterogenous beliefs facing short sales restrictions, and its explanation for the rise, persistence, and eventual fall of Internet stock prices. First, we document substantial short sale restrictions for Internet stocks. Second, using data on Internet holdings and block trades, we show a link between heterogeneity and price effects for Internet stocks. Third, arguing that lockup expirations are a loosening of the short sale constraint, we document average, long‐run excess returns as low as ?33 percent for Internet stocks postlockup. We link the Internet bubble burst to the unprecedented level of lockup expirations and insider selling.     

Earnings Trend and Performance Relative to Benchmarks: How Consistency Influences Their Joint Use

Archival research shows that the market reacts to earnings trend as well as to earnings performance relative to analysts' forecasts (i.e., benchmark performance). We conduct four experiments to investigate how and why investors react to these two measures when both are available over multiple time periods. Our results show that investors rely on an earnings measure only when it is consistent over time. When both measures are consistent over time, investors use them in an additive fashion, suggesting that they view them as providing different information about the firm. Further tests show that investors believe that earnings trend and benchmark performance both provide information about a firm's future prospects and management's credibility. Although judged future prospects fully explain the effect of earnings trend on investor judgments, neither judged future prospects nor management credibility completely explains the effect of benchmark performance. Our study has implications for firm managers and researchers.