alliances and corporate governance.pdfVIP

Alliances and Corporate Governance * ** *** Andriy Bodnaruk Massimo Massa Andrei Simonov Abstract: We study the process of wealth creation by alliances and relate it to the quality of governance of the firms engaging in alliances. We argue that alliances increase firm operating flexibility, reduce the agency costs related to the free-cash flows as well as the agency cost 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. However, 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 (0.38% per month over 36 months) following the announcement of the alliance. Firms characterized by better governance (both internal and external governance) are more likely to engage in alliances. Additionally, value creation by the alliances is related to the quality of governance of the firm. Firms engaging in alliances display higher Tobin’s Q and higher short-term and long-term returns following the announcement of the alliance if the quality of governance of the firm is high. JEL Classification: G34; G23; G32 Keywords: alliances; corporate governance; abnormal return and profitability * *