Alliances and corporate governance ¬リニ

We study the process of wealth creation by alliances and relate it to the quality of governance of firms. We argue that alliances increase firm’s operating flexibility, reduce the agency costs related to the free-cash flows as well as the agency costs related to the distortion in the allocation of capital within the firm. Given the constraints on the use of free cash flows, managers at the helm of bad-governance firms will be more reluctant to engage in alliances. Additionally, when alliances are undertaken, the reduction in the distortion in the allocation of capital should make value creation particularly strong in the presence of good governance. We show that firms engaging in alliances have both higher Tobin’s Q and positive short-term (3.02%) and long-term returns (16.9% over the 36 months following the announcement of the alliance). We also demonstrate that formation and value creation by alliances is related to the quality of governance of the firm. Firms characterized by better governance (both internal and external governance) are more likely to engage in alliances. Firms engaging in alliances also display higher Tobin’s Q and have higher short-term and long-term returns following the announcement of the alliance if their quality of governance is high. JEL Classification: G34; G23; G32