Innovation beyond firm boundaries: Strategic alliances and corporate innovation

In this paper, we empirically analyze how strategic alliances affect the innovation output of the firms forming the alliance. We find a positive effect of R&D-related strategic alliances on corporate innovation, as measured by the quantity and quality of patents filed. This effect is stronger for firms led by CEOs with higher general managerial skills, firms with greater experience from earlier alliances, and firms operating in R&D-intensive industries. Furthermore, the innovation-fostering effect of strategic alliances is more pronounced if alliance partnering firms share a common institutional blockholder or have a higher degree of technological proximity. We also document, for the first time in the literature, a unique contractual mechanism through which firms share the benefits of innovation with their alliance partners, namely, “co-patenting.”     

CORPORATE LIQUIDITY AND NBER RECESSION ANNOUNCEMENTS

Using announcement memos released by the National Bureau of Economic Research (NBER), we show that corporations increase liquidity during the quarter the NBER announces a peak in the business cycle. This reaction is primarily restricted to memos about peaks in the business cycle, whether it is a preliminary announcement or an official confirmation. Federal Open Market Committee and other monetary policy news, real‐time data releases, and tightening credit conditions do not drive the increase. This finding adds to the precautionary cash holdings literature by suggesting that corporations adjust liquidity not necessarily before recessions, but upon confirmation of a recession.     

The performance of corporate alliances: Evidence from oil and gas drilling in the Gulf of Mexico

I use data on oil and gas drilling in the Gulf of Mexico to measure how a corporate alliance—a group of firms that jointly develops an offshore tract—performs relative to a solo firm. I employ a regression discontinuity strategy based on bids in first-price sealed-bid auctions for the rights to develop leases. By focusing on leases where one organizational form narrowly outbids the other, I measure drilling outcomes while controlling for the endogenous matching of projects and organizational forms. Solo firm leases are less profitable than alliance leases because alliance members combine their information and expertise.     

Are current syndicated loan alliances related to past alliances?

The odds of a current syndicate relationship between two lenders depend upon their previous alliances. The odds are significantly higher [lower] and strongest for a current lead–participant relationship with a continuation [reversal] of their previous roles. To illustrate, the odds are nearly four times higher when two lenders have allied in the previous 5 years. The strength of lead–participant syndicate relationships between two lenders with same-ordered roles is most sensitive to the lead bank’s reputation and informationally opaque participants tend to have stronger relationships with lead banks. Lenders exhibit home bias in their syndicate alliances since ongoing relationships are stronger with domestic counterparts.     

Private equity alliances in mergers

This paper examines reasons for alliance formation between private equity bidders when compared to sole-sponsored private equity deals. Testing a comprehensive set of hypotheses, we find strong evidence for the relative-risk hypothesis of Robinson (2008), as private bidders are more likely to form an alliance in a diversifying acquisition. We also find that private equity alliances involved more profitable target firms when compared to sole-sponsored private equity deals. Finally, we find that the significantly lower abnormal returns for target firms in private equity alliance deals are eliminated once we control for differences in the types of target firms acquired by private equity alliances and single private equity bidders. The last result suggests that private equity alliances do not generate significantly lower target returns because of collusion.     

Your alliances are too stable

A 2004 McKinsey survey of more than 30 companies reveals that at least 70% of them have major alliances that are underperforming and in need of restructuring. Moreover, JVs that broaden or otherwise adjust their scope have a 79% success rate, versus 33% for ventures that remain essentially unchanged. Yet most firms don't routinely evaluate the need to overhaul their alliances or intervene to correct performance problems. That means corporations are missing huge opportunities: By revamping just one large alliance, a company can generate 100 million dololars to 300 million dollars in extra income a year. Here's how to unlock more value from alliances: (1) Launch the process. Don't wait until your venture is in the middle of a crisis; regularly scan your major alliances to determine which need restructuring. Once you've targeted one, designate a restructuring team and find a senior sponsor to push the process along. Then delineate the scope of the team's work. (2) Diagnose performance. Evaluate the venture on the following performance dimensions: ownership and financials, strategy, operations, governance, and organization and talent. Identify the root causes of the venture's problems, not just the symptoms, and estimate how much each problem is costing the company. (3) Generate restructuring options. Based on the diagnosis, decide whether to fix, grow, or exit the alliance. Assuming the answer is fix or grow, determine whether fundamental or incremental changes are needed, using the five performance dimensions above as a framework. Then assemble three or four packages of restructuring options, test them with shareholders, and gain parents' approval. (4) Execute the changes. Embark on a widespread and consistent communication effort, building support among executives in the JV and the parent companies. So the process stays on track, assign accountability to certain groups or individuals.     

The impact of corporate governance on corporate performance: Evidence from Japan

Employing a unique data set provided by Governance Metrics International, which rates firms using six different corporate governance dimensions, we analyze whether Japanese firms with many governance provisions have a better corporate performance than firms with few governance provisions. Employing an overall index, we find that well-governed firms significantly outperform poorly governed firms by up to 15% a year. Using indices for various governance categories, we find that not all categories affect corporate performance. Governance provisions that deal with financial disclosure, shareholder rights, and remuneration do affect stock price performance. The impact of provisions that deal with board accountability, market for control, and corporate behavior is limited.     

Simple rules for making alliances work

Corporate alliances are growing in number--by about 25% a year--and account for up to a third of revenues and value at many companies. Yet some 60% to 70% of them fail. What is going wrong? Because alliances involve interdependence between companies that may be competitors and may also have vastly different operating styles and cultures, they demand more care and handling than other business arrangements, say Hughes and Weiss, management consultants at Vantage Partners. The authors have developed five principles--based on their two decades of work with alliances -to complement the conventional advice on alliance management: (1) Focus less on defining the business plan and more on how you and your partner will work together. (2) Develop metrics pegged not only to alliance goals but also to performance in working toward them. (3) Instead of trying to eliminate differences, leverage them to create value. (4) Go beyond formal systems and structures to enable and encourage collaborative behavior. (5) Be as diligent in managing your internal stakeholders as you are in managing the relationship with your partner. Companies that have adopted these principles have radically improved their alliance success rate. Schering-Plough, for example, engages in a systematic "alliance relationship launch": four to six weeks of meetings at which the partners explore potential challenges, examine key differences and develop shared protocols for managing them, and establish mechanisms for day-to-day decision making. Blue Cross and Blue Shield of Florida measures the quality of alliance progress through regular surveys of both its own staff and its partners'. These companies have learned that the conventional advice is not so much wrong as incomplete. The five simple rules can help fill in the blanks.     

Do alliances promote knowledge flows?

We explore the role of interfirm alliances as a mechanism for sharing technological knowledge. We argue that knowledge flows between alliance partners will be greater than flows between pairs of nonallied firms, and less than flows between units within single firms. Using patent citations as a proxy for knowledge flows, we find results that are consistent with these expectations. We then explore how firm characteristics affect knowledge flows within alliances and find positive effects due to technological, geographic, and business similarities between partners. We use alliance data from MERIT, patent data from the USPTO, and firm data from Compustat.     

Industry expertise on corporate boards

Recent surveys indicate that industry expertise is the most sought-after director qualification. Yet evidence on the value of such expertise is limited. This paper shows that firms that are difficult for non-experts to monitor and advise are more likely to appoint industry expert directors. Such appointments also depend on the supply of industry-experienced candidates in the local director labor market. Board industry expertise reduces R&D-based real earnings management and increases R&D investments. The increase in R&D spending is value-enhancing: firms with industry expert directors receive more patents for the same level of R&D, their R&D spending is associated with lower volatility of future earnings, and their value is higher. Finally, industry expertise is associated with CEO termination and pay incentives that encourage R&D investments.     

Domestic airline alliances and consumer welfare

This article investigates the consumer welfare consequences of the recent code‐share agreement between Continental Airlines and Northwest Airlines. We develop a discrete choice model based on individual flight characteristics. This structural model recognizes that consumers (i) may have heterogeneous preferences for flight attributes, and (ii) may face different prices for the same flight. The empirical methodology also deals with the measurement error problem stemming from the absence of consumer‐level data on prices. The estimation results suggest that, whereas the code‐share agreement did not impact consumers significantly on average, it increased the average surplus of connecting passengers but decreased the average surplus of nonstop passengers. Interestingly, the magnitude of our welfare results may be attributed in large part to changes in product characteristics other than prices.     

Information asymmetry and international strategic alliances

This paper examines how information asymmetry affects cross-border strategic alliance formation by US firms over the period 2000–2008. We construct a measure, information costs, based on both geographical distance and the proportion of worldwide GDP the partner’s home country represents. Consistent with our expectations, we find an inverse association between information costs and cross-border strategic alliances. When considering the proportion of alliances formed with publicly quoted overseas partners, we find this is unaffected by the level of information costs but rather the level of stock market development, tax rate and general economic conditions. Information costs are, however, significantly negatively related to alliances with overseas private organizations. Our results offer clear support for the on-going importance of information asymmetry in corporate decision making.     

The way to win in cross-border alliances

Global competition has paved the way to new corporate combinations--and opened up new pitfalls along the way. In "The Way to Win in Cross-Border Alliances," Joel Bleeke and David Ernst offer the unconventional lessons of their study of 49 cross-border alliances. For example, alliances between a weak and a strong company usually don't work; but fifty-fifty ownership of joint ventures actually improves decision making.     

The rise of corporate governance in corporate control research

This article has two related tasks. First, we review the articles published in this Special Issue on Corporate Control, Mergers, and Acquisitions. These articles provide new evidence on several aspects of corporate control and governance including the value and performance effects of various ownership groups, the impact of internal governance structures, the effects of regulatory changes on specific industries and evidence on bidding strategies in takeovers. This analysis leads us to our second task – to examine the evolution of corporate control research, broadly defined. Our analysis shows a movement in research from mergers and acquisitions to a broader analysis of corporate governance, especially internal governance features. We suggest that there is a trend toward an increase in the relative importance of internal governance compared to discipline from the market from corporate control. This trend reflects an important change over the past several decades in the means through which the market disciplines corporate behavior.     

The impact of the corporate balanced scorecard on corporate control—A research note

The paper explores the adoption of the corporate balanced scorecard (CBSC) and its impact on corporate control of business units. Following interviews with senior corporate managers in 15 of Sweden's largest multinational companies, 8 were found to adopt CBSC. However, CBSC had little impact on control at the corporate level. Corporate control was financially focused in all the companies: mainly financial measures were important, standards were only set for financial measures and rewards were largely based on financial performance measures. Top management's need for simplicity and comparability internally, and capital market pressures motivated the financial focus.     

Regulation: The market for corporate control and corporate governance

This study examines the effects of regulation and a contested market for corporate control on the internal mechanisms of corporate governance. The study focus is on two sectors, manufacturing and banking, due to their differences in the governance environment. In the United Kingdom for the sample period used in this study, manufacturing was characterized by a contested market for corporate control with little or no regulatory interference. In banking on the other hand, takeovers, hostile or otherwise, were absent and ownership changes and board appointments were supervised by the regulator—the Bank of England. The findings of the panel data estimates show that, unlike in the manufacturing sector, disciplinary top management turnover in banks was not related to share price performance. Outside directors were significantly less effective in disciplining top management in banks than in manufacturing firms.     

Voluntary corporate liquidations

This paper examines possible motives for and consequences of voluntary corporate liquidations. Specifically, the procedural and tax differences between voluntary liquidations and other control-changing transaction devices are analyzed. An empirical investigation of successful liquidations shows that the announcement of liquidation reduces the risk of liquidating shares, that the shareholders receive substantial gains from successful liquidations, and that the average gains to the acquiring shareholders are not significantly different from zero. These findings suggest that the liquidating firms' assets have been underutilized before liquidation and that voluntary liquidations lead to higher-valued reallocations of corporate resources.