The Wealth Effect of Japanese-US Strategic Alliance

The Wealth Effect of Japanese-US Strategic Alliance 指導老師：賴蓉禾　助理教授 9762104 廖千儀財務金融研究所一年甲班財務管理專題研討

Introduction • Alliances with foreign partners are an important strategic move that could provide access to outside sources of competitive advantage in the global network. • For example, Lockheed Martin Corporation and Japan’s Mitsubishi Electric Corporation had reached an agreement that provided Mitsubishi with access to technology, while helping Lockheed to expand sales in Japan.

Introduction (cont.) • Shareholders earn larger abnormal returns in the Japanese-US alliances when the partnering firms are relatively small in size, have higher growth opportunities, or are less profitable. • Both Japanese and US partnering firms exhibit significant improvements in their operating performance subsequent to the alliances.

The benefits and costs associated with ISAs • Advantages • Explore new market opportunities, reduce investment risks, or establish distribution channel more efficiently. • ISAs simultaneously reduce both the uncertainty and the costs of resources investment associated with full-scale internalization. • ISAs enable the partnering firms to obtain resources that enhance firm’s competitive advantages.

The benefits and costs associated with ISAs (cont.) • Disadvantages • ISAs are often plagued by interest conflicts between partnering firms. • The hold-up problem usually found in contractual collaborations. It could reduce the realized synergy form collaboration or result in renegotiations or even termination of strategic alliances.

The determinants of the wealth effect of ISAs (cont.) • Partner relative size • Growth and technological opportunities • Business relatedness • Prior experience • Profitability • The partner’s home currency strength

Sample and descriptive statistics • Sample design • The sample distribution of announcements of 178 Japanese-US strategic alliances form 1989 to 1998. • Strategic alliances must involve only US firm and one Japanese firm in the same alliance. • US firms must not have made other announcements five days before or five days after the initial announcement date.

Sample and descriptive statistics (cont.) • Sample characteristics • The partnering firm’s size as measured by the market value of equity 30 days before the announcement. • The sample distribution by type of cooperative agreement according to Standard Industrial Classification (SIC) codes scheme. • Classification the Japanese-US partnering firms into high- and low-tech groups according to Business Week’s classification scheme.

Sample and descriptive statistics (cont.) • Explanatory variables • Relative size：announcing firm’s size divided by its partner’s size. • Growth opportunities：estimate by a simple measure of Tobin’s q (Tobin’s q=MVA/BVA). The q variable is the average q for the three fiscal years prior to the announcement. • High-tech industry dummy：equals one for partners that operate in high-tech industries, and zero otherwise.

Sample and descriptive statistics (cont.) • Explanatory variables • Prior experience：international collaboration by the number of both international nonequity alliances and joint ventures with partners from foreign countries within five years preceding the announcement date. • Profitability：the ratio of net income to the book value of assets (NI/assets) for the fiscal year prior to the announcement.

Sample and descriptive statistics (cont.) • We use t-tests and Wilcoxon rank-sum tests, respectively, to assess the differences in means and medians between US and Japanese firms.

Sample and descriptive statistics (cont.)

Stock price responses to alliance announcements • Overall sample • We use standard event-study methods. • We define Day0 as the initial announcement date. • The two-day period (-1,0) captures the price reaction to the alliance announcement. • We evaluate significance according to t-statistics and Wilcoxon z-statistics.

Stock price responses to alliance announcements (cont.)

Stock price responses to alliance announcements (cont.) • Analysis of subsamples • We use t-tests and Wilcoxon signed-rank test. • Relative size (panel A) • Growth opportunities. (High-q firms are those with q above the sample median, and low-q firms are those with q below the sample median.) (Panel B) • Industry affiliation (Panel C) • Alliance type (Panel D)

Stock price responses to alliance announcements (cont.) • Analysis of subsamples • Business relatedness (Panel E) • Prior experience in international collaboration (Panel F) • Profitability ((Panel G) • Home currency strength (Panel H)

Stock price responses to alliance announcements (cont.) • Cross-sectional regression analysis • We estimate the regression using weighted least squares. • Model 1 includes all the potential explanatory variables：relative size, high-tech industry dummy, technical-alliance dummy, business relatedness dummy, previous experience, currency strength dummy, growth opportunities and profitability.

Stock price responses to alliance announcements (cont.) • Cross-sectional regression analysis • Model 2 includes interaction variables between the relative q dummy and announcing firm’s q, interaction variables between currency strength dummy and the large partners dummy, interaction variables between profitability and the two-way alliance dummy.

Operating performance for partners subsequent to alliances • operating return on asset：OIBD/asset, the ratio of operating income before depreciation to assets. • operating cash flows：OCF/assets, operating income less capital expenditures, deflated by total assets • return on assets： NI/assets • asset turnover：Net Sales/assets

Operating performance for partners subsequent to alliances (cont.)

Conclusion • Both Japanese and US shareholders benefit from the international alliance. • ISAs produce a positive wealth effect for the combined partnering firms, with no evidence of wealth transfers between partners. • The abnormal returns to the partnering firms are significantly negatively related to their relative firm size and profitability, and are significantly positively related to their growth opportunities.

Conclusion (cont.) • Both Japanese and US partnering firms experience significant improvements in operating performance over the three-year period following the formation of ISA.

The Wealth Effect of Japanese-US Strategic Alliance