Arms Race or Detente? How Inter-Firm Alliance Announcements Change the Stock Market Valuation of Rivals

37 Pages Posted: 17 Jan 2009 Last revised: 30 Jan 2011

See all articles by Joanne E. Oxley

Joanne E. Oxley

University of Toronto - Joseph L. Rotman School of Management

Rachelle C. Sampson

University of Maryland - Robert H. Smith School of Business; Georgetown University - Robert Emmett McDonough School of Business

Brian S. Silverman

University of Toronto - Rotman School of Management

Date Written: January 16, 2009

Abstract

Most prior event studies find that the announcement of a new alliance is accompanied by a positive stock market response for the partners. This result has usually been interpreted as evidence for the prevailing view that alliances are effective vehicles for partners to acquire or access new skills and thus become stronger competitors. However, partners should also earn positive abnormal returns if alliances are used to shape competitive interactions, attenuating competitive intensity industry-wide.

In this study we disentangle these different mechanisms by examining how alliance announcements affect the stock market's evaluation of allying firms' rivals: If an alliance is expected to make partner firms more competitive, this should lead to negative abnormal returns for partners' rivals; if an alliance is expected to facilitate a reduction in competitive intensity, this should lead to positive abnormal returns for rivals. Results from an event study analysis of R&D alliances in the telecommunications and electronics industries during 1996-2004 provide evidence consistent with competition attenuation in some alliances. Our research thus challenges the increasingly narrow focus on learning and resource accumulation through alliances, and calls for broader consideration of the roles and effects of collaboration, both for individual firms and for industry structure.

Keywords: Alliances, Joint ventures, Event study, Industry structure

JEL Classification: M1, L22, L63

Suggested Citation

Oxley, Joanne E. and Sampson, Rachelle C. and Silverman, Brian S., Arms Race or Detente? How Inter-Firm Alliance Announcements Change the Stock Market Valuation of Rivals (January 16, 2009). Rotman School of Management Working Paper No. 1328965, Robert H. Smith School Research Paper No. RHS RHS 06-069, Available at SSRN: https://ssrn.com/abstract=1328965 or http://dx.doi.org/10.2139/ssrn.1328965

Joanne E. Oxley (Contact Author)

University of Toronto - Joseph L. Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-0305 (Phone)

Rachelle C. Sampson

University of Maryland - Robert H. Smith School of Business ( email )

Van Munching Hall
University of Maryland
College Park, MD 20742-1815
United States
(301) 405-7658 (Phone)

HOME PAGE: http://www.linkedin.com/in/rachelle-sampson-68a3b610/

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

Brian S. Silverman

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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