Alliance Formation and Firm Value

We consider the formation of alliances that potentially create complementarities, that is, when the value function is supermodular in firm resources. We show that, in a frictionless world where information is perfect and managers optimize, firm alliances disproportionately increase the value of high...

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Bibliographic Details
Published inManagement science Vol. 65; no. 2; pp. 879 - 895
Main Authors Cabral, Luis, Pacheco-de-Almeida, Goncalo
Format Journal Article
LanguageEnglish
Published Linthicum INFORMS 01.02.2019
Institute for Operations Research and the Management Sciences
Subjects
Alliances
Analysis
Biotechnology industry
Business valuation
competitive advantage
firm alliances
Information sources
Management science
matching
Regression analysis
Skewness
Strategic alliances (Business)
Value
United States
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Summary:We consider the formation of alliances that potentially create complementarities, that is, when the value function is supermodular in firm resources. We show that, in a frictionless world where information is perfect and managers optimize, firm alliances disproportionately increase the value of high-resource-level firms, resulting in higher variance and higher skewness of the distribution of firm value; moreover, higher-value alliances are subject to regression to the mean at a faster rate. These effects are magnified if the degree of complementarities is endogenously determined by each firm’s investment. We also consider alliances where matching and/or information about firm resources are imperfect, and show that complementarities are a necessary but not sufficient condition for alliances to cause an increase in firm value; and that complementarities are neither a necessary nor a sufficient condition for alliances to be correlated with higher firm value. This paper was accepted by Olav Sorenson, organizations.
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.2017.2954