Potential for Expropriation through Joint Ventures

Posted: 17 May 2007

See all articles by Spencer A. Case

Spencer A. Case

Baylor University

D. Scott Lee

University of Nevada, Las Vegas - Lee Business School

John D. Martin

Baylor University - Department of Finance, Insurance & Real Estate

Abstract

We examine the potential expropriation of a firm's intellectual capital that results from joint venture agreements when a firm's joint venture partner becomes the target of an acquisition attempt. We find that: (1) non-targeted joint venture partners often suffer losses in value upon the announcement of the acquisition; (2) the magnitude of the loss increases with the R intensity of the non-targeted joint venture partner; and (3) average bidder returns are less negative for acquirers if the affected joint venture partners report R&D spending and are in the same line of business as the acquirer. Our estimate of the average loss is $843 million per firm, roughly 3% of the non-targeted firm's pre-announcement equity value. Our evidence suggests a previously unrecognized merger motive in that joint ventures expose a firm's intellectual capital to the risk of expropriation.

Keywords: Intellectual capital, Joint ventures, Mergers, Agency costs

JEL Classification: G32

Suggested Citation

Case, Spencer A. and Lee, D. Scott and Martin, John D., Potential for Expropriation through Joint Ventures. Review of Financial Economics, Vol. 16, pp. 111-126, 2007, Available at SSRN: https://ssrn.com/abstract=986386

Spencer A. Case

Baylor University ( email )

Waco, TX 76798
United States

D. Scott Lee (Contact Author)

University of Nevada, Las Vegas - Lee Business School ( email )

4505 S. Maryland Parkway
Box 456008
Las Vegas, NV 89154-6008
United States
702-895-2526 (Phone)
702-895-4630 (Fax)

HOME PAGE: http://faculty.unlv.edu/slee

John D. Martin

Baylor University - Department of Finance, Insurance & Real Estate ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States
254-710-4473 (Phone)
254-710-1092 (Fax)

HOME PAGE: http://hsb.baylor.edu/html/martinj

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