INFORMATION ASYMMETRY, AWERSES SELECTION THEORY …

"INFORMATION ASYMMETRY, AWERSESSELECTION AND JOINT—VENTURES:

THEORY AND EVIDENCE"

by

Srinivasan BALAKRISHNAN*and

Mitchell KOZA**

N° 90/32/SM

Associate Professor, Department of Strategic Management andOrganisation, The Carlson School of Management, University ofMinnesota, U.S.A.

Assistant Professor of Business Policy, Department of Strategyand Management, INSEAD, Boulevard de Constance, Fontainebleau77305 Cedex, France

This paper is a revised version of the INSEAD Working Paper 89/18.

Printed at INSEAD,Fontainebleau, France

INFORMATION ASYMMETRY, ADVERSESELECTION AND JOINT-VENTURES

Theory and Evidence

ABSTRACT

We propose that intermediate forms of organization like joint- ventures are superior

to markets and hierarchies when the costs of valuing complementary assets are non-

trivial. By allowing piecemeal transactions under shared ownership and control, joint-

ventures can reduce these costs significantly. Our theory is supported by the results

of a cross-sectional analysis of the abnormal returns to the parent firms in 64 joint-

venture announcements.

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A joint venture is a special mechanism for pooling complementary assets owned

by separate firms.' In most joint venture: he parent firms combine part or all of their

assets into a legally separate unit and agree to share the profits from the venture. Like

the more typical common stock company. this unit is usually free to raise additional

capital, enter into contracts, buy and sell goods and services. hire employees, and the

like. In matters of policy making and control, however, the joint venture is more like

a partnership. A typical common stock company is governed by a Board, which acts

as the fiduciary agent of the numerous stockholders at large who are mostly investors

with little or no interest in policy or control. In a joint venture. the ownership and

control is shared by the parents in a more active sense. The parent firms through their

appointed representatives have a direct interest in the policy decisions and the control

of the operations of the "child". Often, an explicit collateral contract or agreement,

stipulating the mutual rights and obligations of the parent firms, accompanies the

formation of a joint venture.

In this paper, we present a comparison of joint-ventures. market mediated contracts

and hierarchical governance and analyze the trade-offs between (i) the transaction costs

in writing and executing contracts in the intermediate product market. (ii) the costs of

administering hierarchies and joint-ventures. and (iii) the costs that accompany control

transactions that redistribute the ownership of assets. The focus of our theory is on

the costs of redistributing ownership rights over assets. which we argue are non-trivial

when assets are non-homogenous and information about their quality, performance

characteristics. and value is not common knowledge. Asymmetric information about

the quality or the value of the target assets creates an "adverse selection" or a "

lemon " type of problem (Akerlof, 1970), creating roadblocks for a complete transfer of

ownership rights as in an acquisition. We propose that a joint-venture is a mechanism

for getting around this problem. It avoids a terminal control transaction and allows

piecemeal and continuous reassessment of the individual contributions to the venture.

A testable implication is that the shareholders of the parent companies will be

favorably disposed towards joint-ventures when the parents are less informed about

each other's business. With potential aggravation of the 'lemon' problem in this case,

acquisition will be more costly. We tested this with a sample of 64 domestic joint-

ventures, using the event study method. The results, based on a cross-sectional

analysis of the abnormal returns to the shareholders during the announcement of these

joint- ventures, support our hypothesis.

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JOINT-VENTURES: BETWEEN MARKETS AND HIERARCHIES

Most modern businesses require access to a variety of laterally or vertically com-plementary productive assets and functional capabilities to produce and deliver a mar-ketable product. Classical economics assumed that transactions between firms canbe carried out costlessly in the intermediate markets so that production is charac-terized by complete and efficient division of labor and specialization. Coase (1937)was one of the few economists to challenge this assumption of costless transactions.Williamson (1975. 1987) has compared two alternative mechanisms by which firmsmay access complementary assets: (i) market mediated contract and (ii) hierarchywhen transactions are costly. A firm may choose to buy the relevant intermediateproducts under a spot or long-term contract negotiated on an arm's length basis. In-sufficient information, uncertainty and bounded rationality, however, prevent managersfrom writing complete contracts which specify all future contingencies, leaving scopefor opportunistic behavior and bargaining over changes. Vertical integration mitigatesor eliminates these problems.

Joint-ventures constitute another alternative for gaining access and control overcomplementary assets. By most definitions. joint- ventures imply equity and profitsharing. The essential characteristic of a joint-venture is that unlike a hierarchy. thereis no ultimate "unity of command" and property rights and control are shared. 2 Acollateral contract usually specifies and limits the rights and obligations of the parentfirms.

The literature on joint-ventures spans several disciplines including finance. indus-trial organization, organization theory, and business policy. Previous studies can beclassified into three broad groups: (i) theoretical and empirical studies which identifythe motives for joint-ventures as market power, resource dependence, synergy or risk-sharing (Berg and Friedman. 1980; Boyle. 1968; Duncan. 1982: Fusfeld. 1958; Harri-gan, 1985: McConnell and Nantell. 1985: Mead. 1967; Ordover and Willig. 1985; Pfefferand Nowak. 1976:Vickers. 1985) (ii) studies of international joint- ventures, many ofwhich view them as multinationals' responses to host-government demands (Beamish.1984: Contractor and Lorange (1988); Franko. 1971: Friedman and Kalmanoff, 1961)(iii) field studies which have led to guidelines for better management of joint-ventures(Harrigan. 1986: Killing. 1986). When there is no government insistence, this literaturesuggests three motives for joint-ventures:

1. Joint-ventures are formed to realize synergies. Synergies are necessary but not

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sufficient conditions for a joint-venture, because contracts and hierarchies also

enable firms to access and control external. synergistic, resources.

2. The second explanation is that joint-ventures are instruments for gaining market

power and other strategic considerations. The empirical evidence for this is

mixed and inconclusive. Not withstanding the inconclusiveness of the evidence.

the market power argument also does not explain why a joint-venture is preferred

when a contract or a merger of the parent firms could have accomplished the

same results. In fact, with the exception of the joint R&D ventures, the anti-

trust policies of the Justice Department and the Federal Trade Commission had

treated mergers and joint-ventures equivalently (Brodley, 1976).

3. Finally, some practitioners have argued that joint-ventures are formed to share

the risk of uncertain business prospects. Implicit in this argument is the failure of

the financial markets to allocate risk efficiently. With efficient financial markets,

firms do not gain much by privately allocating risk between them and risk sharing

as a motive for joint-ventures looses its significance. Empirical evidence also does

not substantiate risk- sharing as a significant motive for joint-ventures (Pfeffer

and Nowak, 1976).

A theoretical issue that has not been addressed until recently is the relative effi-

ciency of joint-ventures and other mechanisms for coordination such as contracts and

hierarchies. Bruce Kogut (1988) offers a transaction cost based perspective on the rel-

ative merits of joint-ventures and other forms of coordination. His focus of comparison

is. however, on the long-term contract, which he argues. will be supplanted by joint

ventures for transactional and strategic considerations. Acquisition, which results in

hierarchical governance, is ruled out as inefficient for unspecified diseconomies. The

unique features of a joint-venture are shared ownership and control. Thus, it is a

"half-way house" between a contract and a hierarchy. Why do firms choose to joint-

venture when they could have merged or sold assets to form a hierarchy? One source

of diseconomy in redistributing the assets to form a hierarchy could be the inalien-

ability of the relevant assets from the parent firms. On closer examination, this does

not appear to be the issue as the joint-venture is also a separate legal and account-

ing entity.' A theory of joint- ventures should therefore explain what diseconomies of

hierarchies motivate the parents to settle for shared ownership and control.

5

INFORMATION ASYMMETRY, ADVERSE SELECTION AND THEJOINT-VENTURE

The Valuation Problem

When considerations of intermediate market failure lead a firm to enter laterally

or vertically related businesses, a number of non- trivial costs are incurred. Costly

and time-consuming R&D is necessary if proprietary technologies are involved. The

search for reliable suppliers and the selection of specialized plant and equipment with

compatible technical standards is also a complex task which may require specialized

knowledge. Technicians, engineers and managers for the new venture need to be

screened for their skills, recruited and trained to adapt to the new equipment. Many

teething problems will have to be overcome before the new production lines can be

brought up to capacity. Knowledge and organizational limitations will constrain the

speed and efficiency with which the firm can carry out these tasks. On the other

hand, strategic considerations such as first-mover advantages, may warrant the speedy

completion of these tasks. The firm may, therefore, decide to acquire part or all

of an extant firm which already has the technology and other assets. Acquisition

considerably shortens the internalization process and saves valuable time.

It is reasonable, however, to expect that the target firm will not sell unless it receives

a bid which is at least equal to the net present value of its assets. If the target assets

are specialized and there are no competitive markets in which identical assets are

traded. information on their prices will be either costly to obtain or unavailable. A self-

interested target firm will exploit this situation and opportunistically misrepresent the

value of its assets. Two examples from the takeover market illustrate the problems and

the pitfalls that a prospective buyer faces. After acquiring Collins de Aikman. a carpet

manufacturing firm. Wickes Inc.. discovered that the company had defaulted on certain

federal flammability standards concerning carpets it had supplied to schools. To meet

the potential product liabilities. Wickes had to set aside roughly $300 million which

was 20 % of the purchase price of CoWins do Aikman. In another instance CPC. a food

processor and corn milling company had acquired Mueller, a large pasta business, from

McKesson. a San Francisco based company for $ 125 million in 1983. In 1985, CPC

filed a 76 million suit against McKesson and Morgan Stanley. the investment bankers

for the acquisition, charging that it was induced to make the acquisition by fictitious

projections of Mueller's near-term and future performance. Ravenscraft and Scherer

(1987) describes several other instances in which both apparent and latent problems

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wit ui the target firms fail to surface, even if pre-merger inspections were undertaken.

The target firm obviously has better information about the true value of its assets

and capabilities because of prior ownership and use. It may, however, choose to

withhold information about quality or organizational problems and inflate output and

other positive aspects. As Ravenscraft and Scherer (1987) have put it, "Would-be

sellers naturally present their best face." The target fi rm cannot credibly assure the

acquiring firm that it will disclose all the information that it has and negotiate the

sale in good faith, even if it were inclined to do so. The transfer of ownership of the

complementary assets is thus impacted by the "adverse selection" (Akerlof. 1970). The

acquiring firm. recognizing asymmetric information and the potential for opportunistic

misrepresentation by the target, will discount the price offered accordingly. Although

negotiations may continue and the acquiring firm may sweeten its offer, the process

will be terminated without a sale when the final offer falls short of what the target

firm knows to be the true value of the assets. There is evidence of such failures of

the market for acquisition from the finance literature. Bradley (1980) reports that 97

tender offers in his sample of 258 were unsuccessful. In Dodd and Ruback's (1977)

study. 48 out of a total of 172 tender offers were unsuccessful. The number of failures

can be more if merger and sell-off attempts are also included. While not all of these

unsuccessful acquisition attempts may be due to the adverse selection problem, they

are indicative of the significant costs involved in control transactions.

It is useful at this point to distinguish between risk arising from uncertain prospects

for a venture and the adverse selection due to asymmetric information. Suppose that

the buyer has all the information that the seller has about the target assets. There

will still be residual uncertainty about the venture (uncertainty about demand for its

products, for e.g.) which will be common to both the buyer and the seller. The buyer

can efficiently share this residual risk of the new venture by selling the risky claims

in the capital market. The price offered and accepted for the target assets will be

discounted to reflect the premium charged for this risk. A rational seller should accept

this offer because it is the true (risk-adjusted) value of his assets. If in addition,

there is an asymmetry between the buyer's and seller's information about the assets,

the price offered for the assets will be further discounted to reflect this asymmetry.

The seller will refuse to sell in this case because the offer price will fall short of his

expectations.

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The Joint-Venture Solution

When the market for acquisitions fails, firms can form joint- ventures for combining

complementary assets. Transactions governed by a joint-venture will be efficient for

the following reasons:

1. First. a joint-venture allows the partners to rescind the relationship at a relatively

low cost. It can be structured as a mechanism which. like a leasing contract,

allows piece-meal transactions and renegotiation of compensation for individ-

ual contributions. Unlike a terminal sale and transfer of ownership rights, the

possibility of repeated contracting and termination of the relationship under a

joint-venture can induce information revelation and mitigate the adverse selec-

tion problem. There may be short-term gains from misrepresentations, but the

threat of liquidation of the joint-venture because of the resulting downstream

inefficiencies and losses will offset these gains and reduce the incentives to mis-

represent.

2. Second. the joint-venture, unlike a lease, introduces for each parent limited and

informal property rights and obligations, by way of shared ownership. The

members of the governing board or the executive committee of the joint venture,

who are usually drawn from both the parent companies, collectively decide the

policies of the joint-venture. They may also have limited rights to formally or

informally audit and verify the claims and actions of the parents by monitoring

the use of the assets of their respective parent companies as well as those of the

partner. These features of a joint-venture, unavailable in a pure contract such

as a leasing agreement. help to reduce the incentives for opportunistic behavior

in the joint-venture.

3. Finally, the joint-venture affords opportunities for learning and gathering new

information about the value of the partner's assets. Monitoring and auditing the

partner's asset use facilitate the learning process and eventually, the pricing of

those assets.

The joint-venture. however, is not a costless mechanism for combining assets. Because

of the absence of "unity of command", costly disputes over sharing the gains from the

venture are still a possibility. Renegotiations can potentially be expensive. Because

of shared control and the lack of "unity of command", the administrative costs of

8

managing the joint-venture will be more than the corresponding costs for a hierarchy.

These transaction costs may be viewed as the price that the joint-venture parents pay

to acquire the option to purchase the assets of the partner when the uncertainty about

the quality and value of the assets is fully resolved. Joint venture is thus a compromise

between a contract and a hierarchy. combining some of their positive features, but not

quite eliminating their negative features. It is the result of tradeoffs between the costs

of transaction in the intermediate markets and the costs of redistribution of property

rights in the market for corporate control.

There is still a puzzle that remains to be solved. If there are efficiency gains in

pooling the complementary assets into a join- venture, why were they owned separately

in the first place? The need for reorganization of the assets must have been sudden

or unanticipated. This may not be as farfetched as it may sound. Penrose (1959) has

argued that the firm at its inception may not recognize the production possibilities of

its assets fully. Instead, it uncovers them over time through a largely random process

man-machine interaction and learning by doing. Rumelt (1974) suggests a similar

process in the concentric and linked diversification of the initially single business firms.

Chandler's (1977) historical study of American businesses indicate that almost all of

them had started as single business and then evolved gradually into integrated and

diversified corporations. Industrial reorganization and the redistribution of ownership

rights and control over productive assets is therefore a necessary part of the process

of adaptation to technological progress and market evolution.

Empirical Implications

Summing up the arguments thus far. we note that strategic considerations and the

failure of the markets for intermediate products provide the incentives for firms to seek

lateral or vertical acquisitions. On the other hand. the lack of complete information

about the target assets may cause the market for corporate control to fail also. The

less informed the partners to a control transaction are about each other's businesses

and the higher the perceived variance in their valuation of the assets, the greater is

the likelihood of the failure of the market for acquisitions. Under these conditions.

the joint-venture can emerge as a superior substitute for both contract and hierarchy.

A testable implication is that. ceteris paribus. the shareholders of the parent firms

should expect greater gains from joint ventures. net of all transaction costs. when

the parents' primary business operations are dissimilar such that they are not capable

9

of appraising the value of each other's technology and assets. Our main testable

hypothesis is therefore:

Hypotheses 1 Shareholder reactions to the unanticipated announcement of joint-ventures will be positively correlated with the extent to which the primary businessoperations of the parent companies are dissimilar.

Hypothesis (1) calls for careful interpretation. The investors will respond less favorably

to joint-ventures between parents in similar businesses because the joint-venture is

not the minimum cost mechanism for coordinating synergistic assets in this case. The

appropriate mechanism here is the outright acquisition of the target assets. The value

of the option of joint-venturing is less because the informational gain is less when

the parents have better prior information on each other's assets. The failure of the

parent firms' management to use the most efficient mechanism may also be a signal

to the market about either poor management or the presence of managerial motives

behind the decision. The important point is that Hypothesis (1) is independent of the

magnitude of the synergistic value created by the joint-ventures. The degree of synergy

between the assets is not pertinent to the arguments about the relative efficiency of

the different mechanisms of coordination. In fact we expect value to be created in all

forms of coordination including joint-ventures. To expect otherwise is to deny the very

purpose of combining the assets, which leads us to our second hypothesis:

Hypotheses 2 On an average, investors in parent firms, anticipating significantgains from combining their complementary assets, will react favorably to joint-venture announcements.

The third hypothesis follows from our discussions on collusion and monopoly gains as

motives of joint-ventures. While theoretically plausible, our assessment of the empirical

evidence for collusion as a motive for joint-ventures is that it is mixed. Ceteris paribus,collusion and monopoly gains are most likely when the parent firms are in the same

industry. Therefore:

Hypotheses 3 Shareholder reactions to joint-ventures between parent companieswhose principal businesses are in the same industry will differ significantly fromtheir reactions to other joint-ventures.

To assess shareholder reactions to joint-venture announcements and test our various

hypotheses, we will use the standard event study method (Fama et a/, 1969) which hasbeen widely used in finance literature to evaluate corporate mergers and acquisitions.

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? ETHODOLOGY

Evaluation of Investor Reactions

The event study method involves estimating the abnormal returns, if any. to theparent company's common stock holders when the stock price has adjusted to thenew information revealed by the announcement. In the standard event study method.the market model is first used to predict the normal return to the common stock of afirm:

Rig = + Qi1Nnt + fit

where.the return of firm i in period t

Rmt the return on value/ equally weighted mar-ket portfolio of securities in period t

ai and = firm specific parametersfit random error -- N(0, cri)

The model parameters are estimated using the monthly or daily firm and marketreturns for an estimation period preceding some discrete, unanticipated events (e.g..announcement of mergers, joint-ventures etc.). The deviations of the actual returnsfrom the predicted returns on the relevant securities - the abnormal returns - fora conventionally chosen event period around the event date but falling outside theestimation period, are then computed from:

ARit = Rie — (a; + ARna)

where. & and '4. are the ordinary least squares estimates of the parameters of themarket model. These abnormal returns are then averaged over a large sample of firmsaffected by similar events to cancel out the effect of extraneous noise:

NARg = I ARig

N

where N is the number of parent firms in the sample. The cumulative abnormal return(CAR) over any interval [t 1 ,t2] is obtained from,

g1CAR[ti, t2 ] = EAR,

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where. t 1 and t2 are the beginning and ending month of the period over which the

cross-sectional average returns are cumulated. ARt and CAR[t i , t21 form the basic

statistics for evaluating the investor reactions to the event. A statistically significant

positive average return or CAR indicates that the event has a positive impact on the

return on the stocks of the firms affected by the event. Event studies assume that the

capital market is informationally efficient. In its weak form, this means that the market

adjusts instantaneously to publicly available information. The event study method is

simple to use and has proved to be quite powerful and robust in evaluating discrete

events affecting firms. Even though the joint-venture formation may extend over a long

time — it often does — the event study method is appropriate if the pre-announcement

negotiation is not public information.*

Sample

To evaluate investor reactions to the announcement of joint- ventures, we con-

structed a sample of joint-ventures from the quarterly joint-venture roster published

in Mergers and Acquisitions during the four year period 1974 – 1977. The period

was chosen to take advantage of industry data from the FTC Line of Business Re-ports, 1974-77. which the authors are using in other concurrent research projects on

joint-ventures. The following criteria were used to select the sample:

1. The joint-venture should be entirely U.S. based. Both parents should be incor-

porated in the U.S. and the joint-venture should also have its operations mainly

in the U.S.

2. The joint-ventures selected should not involve more than two parent companies.

This criterion was adopted to avoid the messy issues in measuring the similarity

among three or more parents.

3. The joint-venture should have been reported in the Wall Street Journal or in any

of the trade journals covered by the F&S Index of Corporate Changes during the

same month as indicated in the effective date of the joint-venture reported by

the Mergers and Acquisition roster.

4. Both the parent companies should be listed in the Million Dollar Directory of

American Businesses, along with the SIC (Standard Industry Classification)

codes for their primary businesses.

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5. At least one of the parent's stock returns should be available from the monthly

returns file of the Center for Research in Security Prices (CRISP) at the University

of Chicago. for a period covering 72 months before and including the month of

the announcement of the joint-venture.

Our final sample consisted of 64 joint-ventures and 85 parent companies which satisfied

these criteria. Table 1 lists the number of joint-ventures and parent companies in

the sample for each year. For each of the 85 parent companies in our sample of

joint-venture announcements, we first estimated the market model using the monthly

returns from the CRISP files. for the period t-72 to t_ 13 , with to being the event month,

referring to the month of the joint-venture announcement. The abnormal returns and

the CAR's for each parent were computed for 13 months including the announcement

month. t_12 to to. The estimation and announcement periods chosen were comparable

to previous event studies using monthly returns (see for e.g. Asquith and Kim. 1982;

Dodd and Ruback. 1977; Malatesta. 1983).

— insert Table 1 about here —

RESULTS AND DISCUSSION

Table 2 shows the average and cumulative abnormal returns, and the cross-sectional

variances for t_12 to to. for all the parent firms in the sample. The table reveals that the

stockholders of the parent companies obtained an abnormal return of 1.19 % during

the month of the announcement of the joint-ventures. The Z- statistic for this return

was significant 0.01 level and therefore the null hypothesis of no significant gains from

combining the complementary assets of the parent companies in a joint-venture can

be rejected.'


Fig.1 is a plot of the cumulative abnormal returns for the period. The cumulative

abnormal returns increases 3.9% from t_12 to to. The increases in abnormal returns

over several other sub- intervals or holding periods were also statistically significant.

These results broadly support Hypothesis (2). Shareholder realize significant gains

from joint-ventures, a result which is consistent with previous results obtained by

McConnell and Nantell (1985).6

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Of primary interest to us is whether the investors react less favorably to joint-ventures between parents operating in similar businesses. To investigate the relation-ship between joint-venture efficiency and parent similarity and test Hypothesis 2. weconstructed a simple measure of the "distance between the primary businesses of theparent companies. The measure was based on the 3-digit SIC's of the parent firms ofthe jth joint- venture, normalized over the maximum possible distance:

Di = S — SIC12 I /899

Greater the distance, more dissimilar the businesses are. 7 We expect the abnormalreturns obtained by investors from joint-venture announcements to increase with thedistance between the parent companies. If we regressed the abnormal return for theevent month for each parent company on the corresponding distance the slope shouldbe positive. To correct for possible heteroscedasticity. we first standardized the ab-normal return for each parent company i (Brown and Warner. 1985):

S = ARiticri

where.

— (ir (AR, AR,) 2 /60 ,t=-72

The standardized abnormal return for the announcement month for each parent com-pany in the sample was than regressed on the corresponding distance between itsprimary business and the primary business of its partner in the joint-venture. We alsorepeated the regression with a rank transformation of the distance as the independentvariable. The results of these regressions are summarized in Table 3. The coefficientfor the distance as well as its rank transformation was positive and significant 0.007and 0.018 respectively. These results seem to lend considerable support to our hypoth-esis that investors will react more favorably to the announcements of joint-venturesbetween parents in dissimilar businesses.

Much as we would like to consider this evidence as conclusive, the shortcomingsin the methodology arising from our measure of similarity of businesses require us tointerpret the results with caution. We had noted earlier that the distance measurebased on SIC captures only the information content of production technology. This isan obvious limitation. Also, to the extent that the distance measure reflects potential

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competition between the parents in their core markets, the methodology admits alter-

native interpretations of our main result that joint-ventures between similar parents are

less favorably received than those between dissimilar parents. The interpretation that

favors our theory is that the market's poor response is because of the wrong choice

of the coordination mechanism. Acquisition is the least cost mechanism for realizing

synergies when the parents are in related businesses and they pay a penalty when

they fail to fulfill the market's expectations about this. The alternative interpretation

is that when the parent businesses are in adjacent markets, the likelihood of future

conflicts between them is more, increasing the costs of administering the joint-venture

successfully. This may indeed be so and it tempers our enthusiasm about the results

which may have little to do with the costs of adverse selection in control transactions.

Further research is required before we can reject these competing interpretations.

— insert Table S about here —

To test the third hypothesis that joint-ventures facilitate collusion and result in

significant gains in monopoly power for the parents, we divided the 64 joint-ventures

into two portfolios based on the parents' primary businesses: (i) the monopoly portfolio

of 11 joint-ventures in which the parent firms' businesses were within the same or 4

or 3 digit SIC and (ii) the remaining 53 joint-ventures which we call the non-monopoly

portfolio.' The average abnormal returns. CAR's and the cross-sectional variances

for the two portfolios are reported in Table 4. The average abnormal return for the

announcement month for the monopoly portfolio was positive but insignificant. For the

non-monopoly portfolio of joint-venture.s the average abnormal return to the parents

was positive and significant 0.01 level. The t-statistic for the difference between the

two averages was positive in favor of the non-monopoly portfolio and significant 0.01

level. The Wilcoxon-Mann-Whitney rank test statistic for the difference between the

two sub-samples was also positive but not significant. Over longer intervals, however,

the cumulative average returns for the two portfolios did not show any significant

differences.


The CAR's are plotted in Fig.2. The CAR's for both the groups increase from

t_12 to to. the announcement month. The CAR's for the monopoly portfolio are

generally lower than those for the non-monopoly portfolio during the period t_12 to

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to. Taken together, these results seem to reject collusion as the primary motive forjoint-ventures. We may also infer from these results that the parent companies in themonopoly group would have been better off with the outright purchase and acquisitionof the complementary assets than organizing them in a joint-venture.

Noting that the distance between the parent companies in the monopoly joint-ventures is zero, and that this may be a potential source of distortion in the regressionsfor testing Hypothesis (1). we replicated these regressions after excluding these joint-

ventures from the sample. Table 3 reports the results of the regressions for thistruncated sample along with those for the full sample. For the truncated sample,the coefficients of the distance and its rank transformation were both positive andsignificant 41.004 and .002 levels, respectively. Again, the evidence strongly supportsour hypothesis that joint-ventures will be preferred when the parents are primarilyengaged in dissimilar businesses.

CONCLUSION

Earlier studies of joint-ventures have likened them to mergers and acquisitions,

as a mechanism for realizing synergies. collusion or risk-sharing. Our theory is thatthe joint-venture is a mechanism for pooling complementary assets without havingto resort to a terminal sale and redistribution of ownership and control rights overthese assets. Such non-terminal mechanisms will be efficient when the market foracquisitions fails due to the asymmetry between the seller's and buyer's informationabout the target assets. This is most likely when the parents operate in dissimilarbusinesses.

Our theory is supported by the evidence based on investors' reactions to joint-

venture announcements. In an event study of 64 joint-venture announcements, we ob-

served that the shareholders of the parent companies involved in these joint-venturesobtained significantly larger abnormal returns when these companies were engagedin businesses which were further apart in a technological and managerial sense. Al-though value is created in all joint- ventures, the shareholders seem to favor more,joint-ventures between parents engaged in dissimilar businesses. We interpret theseresults to mean that while both joint-ventures and acquisitions may yield synergisticgains to shareholders, there are non-trivial differences between the two mechanisms.

Under specific conditions one may be superior to the other. Besides the obvious impli-cations for management's choice between acquisition and joint-venture, the theory and

16

empirical results should also be of interest to policy makers in the areas of anti-trust

and interfirm cooperation.

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NOTES

1. Following Richardson (1972). we define assets or the functions embodied in

them as complementary. "when they represent different phases of a process of

production and require in some way or another to be coordinated." By assets

here and elsewhere in the paper, we mean physical assets, tangible and intangible.

which are alienable and for which property rights are well-defined.

2. Joint-ventures set-up as limited partnerships are an exception. The 'sleeping'

partners in a limited partnership joint- venture has no say in policy making or

control.

3. Hennart (1988) describes some diseconomies of acquisition of firm-specific as-

sets. These relate to international joint-ventures where cultural and national in-

terests may make acquisitions more costly than joint-ventures. Also. see Kogut

and Singh (1985), who present some evidence for this.

4. A number of studies in finance, strategy and other areas have employed the event

study method to evaluate investor reactions merger announcements (see Jensen

and Ruback. 1983 and Weston and Chung. 1983, for a review of several event

studies of acquisitions). Protracted negotiations and anticipation is a problem

in all these studies but not a serious one provided appropriate precautions are

undertaken. Also, see Brown and Warner (1980:1985) for an assessment of

the statistical power of the event study method and the associated tests in

successfully detecting abnormal returns from unanticipated events.

5. The appropriate test-statistic for the abnormal return is given by

ARtZ =

at

where a is given by.

t=-isat = ( E (ARt — A=R)2160,

t=-72

= t-131AR= — E ARe

60 g=-72

18

Z is distributed Student—t and for large samples. is approximately unit normal

(Brown and Warner. 1985).

6. We note that the average abnormal returns for t = —10 and t = —6 are sig-

nificantly positive and negative, respectively. We are unable to explain this.

Perhaps, this is a small sample problem. which tempers our enthusiasm about

the other results as well.

7. We recognize the limitations in using the nominally scaled Standard Industrial

Classification, which is based primarily on production technologies, for measur-

ing similarity of businesses. With more information about past transactions and

other relationships between the joint-venture parents. we can, in principle, con-

struct a more complex measure of the information asymmetry between them.

Much of this information, however. is proprietary and difficult to obtain.

8. See Caves et al (1980:199-200) for a measure of "distance" between businesses

based on their SIC's which takes a value of zero if the 4-digit SIC's of the two

parent were within the same 3-digit SIC. a value of one if they were in different 3-

digit SIC's but the same 2-digit SIC's, and a value of two if they were in different

two digit SIC's. In our sample there was just one joint-venture for which this

distance had a value of 1. that is, the parent companies primary businesses were

in different 3-digit SIC's but the same 2-digit SIC. This rather small sample

problem forced us to form two portfolios instead of three, if we had followed the

Caves et al measure strictly.

19

References

[1] Akerlof, G.A. 1970. "The Market for 'Lemons': Qualitative Uncertainty and theMarket Mechanism." Quarterly Journal of Economics, 84:488-500.

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[31 Asquith, P. and E.Han Kim. 1982. The Impact of Merger Bids on the ParticipatingFirms' Security Returns." Journal of Finance. December:1209-1228.

[4] Berg. Sanford and Philip Friedman. 1981. " Impacts of Domestic Joint Ventureson Industrial Rates of Return: A Pooled Cross- Section Analysis. 1964-1975".The Review of Economics and Statistics. 63:293-298.

[5] Boyle. S. 1968. "An Estimate of the Number and Size Distribution of DomesticJoint Subsidiaries." Antitrust Law and Economic Review. 1:81-92.

[6] Bradley. Michael. 1980. "Interfirm Tender Offers and the Market for CorporateControl". Journal of Business. 53:345-376.

[71 Brodley. J.F. 1976. "The Legal Status of Joint Ventures Under the AntitrustLaws: A Summary Assessment." Antitrust Bulletin. 21:453-83.

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[91 . Using daily stock returns: the case of event studies. Journal

of Financial Economics. 14. March. 1985. 3-31.

[10] Caves. R.E.. Porter. M.E.. Spence. A.M. and Scott. J.T. 1980. Competition in

the Open Economy. Cambridge. MA: Harvard University Press, 199-200.

[11] Coase. R.H. 1937. "The Nature of the Firm," Economica. 4:331-351.

[12] Contractor. F. and Lorange. P. (1988). Cooperative Strategies in International

Business. Lexington. MA: Lexington Books.

[13] Cozzolino, J.M. 1981. "Joint-Venture Risk: How to Determine Your Share." Merg-

ers and Acquisitions. 16(3):35-39.

20

[14] Dodd. Peter and Ruback. Richard. 1977. "Tender Offers and Stockholder Returns:An Empirical Analysis". Journal of Financial Economics. 5:351-374.

[15] Duncan. J.L. 1982. Impacts of New Entry and Horizontal Joint Ventures onIndustrial Rates of Return." Review of Economies and Statistics. 64:339-343.

[16] Fama. E.F.. Fisher. L.. Jensen. M.C. and Roll. R. 1969. The adjustment of stockprices to new information. International Economic Review. 1:1-21.

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[18] Friedman. W. and Kalmanoff. G. 1961. Joint International Business Ventures.New York: Columbia University Press.

[19] Fusfeld. D.R. 1958. "Joint Subsidiaries in the Iron and Steel Industry." AmericanEconomic Review. 48:578- 587.

[20] Harrigan. K.R. 1985. Strategies for Joint Ventures. Lexington. MA: LexingtonBooks.

[21] Harrigan. K.R. 1986. Managing for Joint Venture Success. Lexington. MA: Lex-ington Books.

[22] Hennart. J.F. 1988. "A Transaction Costs Theory of Joint ventures". StrategicManagement Journal. 9:361-74.

[23] Jensen. M.C. and Ruback. R. 1983. The Market for Corporate Control. Journalof Financial Economics, 11:5-50.

[24] Killing. J.P. 1983. Strategies for Joint Venture Success. New York: Praeger.

[25] Kogut. B. 1988. Joint Ventures: Theoretical and Empirical Perspectives. StrategicManagement Journal. 9:319-22.

[26] Kogut.B. and Singh. H. "Entering the United States by Acquisition or Joint Ven-ture: Country Patterns and Cultural Characteristics". Working Paper. The Whar-ton School. 1985.

[27] Malatesta. P.H. The wealth effect of merger activity and the objective functionsof merging firms. Journal of Financial Economics. 11: 155-181.

21

[28] McConnell. J.J. and Nantell. T.J. 1985. "Corporate Combinations and Common

Stock Returns: The Case of Joint Ventures." Journal of Finance, 2:519-536.

[29] Mead. W.J. 1967. "The Competitive Significance of Joint Ventures." AntitrustBulletin, 12:819-849.

[3O) Ordover. J.A. and Willig. R.D. 1985. "Anti- trust for high-technology industries:

assessing research joint- ventures and mergers". Journal of Law and Economics,28:311- 43.

[31] Pfeffer. J. and Nowak. P. 1976. "Joint Ventures and Inter-organizational Interde-

pendence", Administrative Science Quarterly. 21:398-418.

[32] Vickers. J. 1985. Pre-emptive patenting, joint- ventures. and the persistence of

oligopoly". International Journal of Industrial Organization, 3:261-73.

[33] Weston, J.F. and Chung. S. 1983. "Some aspects of merger theory." Journal ofMidwest Finance Association, 12:1-33.

[34] Williamson. Oliver E. 1975. Markets and Hierarchies. New York: Free Press.

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tractual Relations". Journal of Law and Economics. 1979, 22:233-261.

22

Table 1Sample

Year Number ofinint-vpntnros

Number of

Parent Firmc1974 8 10

1975 16 22

1976 22 30

1977 18 23

Total 64 85

23

Table 2Abnormal Returns: Full Sample

All joint-ventures: N = 85RelativeMonth

AbnormalReturn

CAR Cross-sectionalVariance

-12 -0.0039 -0.0039 0.0061-11 0.0191 0.0152 0.0094-10 0.0042 0.0194 0.0069-9 -0.0036 0.0157 0.0075-8 0.0071 0.0228 0.0059-7 0.0071 0.0299 0.0067-6 -0.0171 0.0128 0.0093-5 -0.0040 0.0088 0.0090-4 0.0013 0.0101 0.0111-3 -0.0027 0.0075 0.0060-2 0.0100 0.0175 0.0063-1 0.0097 0.0272 0.00630 0.0119 0.0390 0.0055

24

Table 3

Regression Results

All Joint-ventures Truncated Sample

Distance Rank Distance Rank

Constant -0.0485 -0.1607 -0.163 -0.629

X Coefficient 0.9399 0.0076 1.5924 0.0155

t-statistic 2.469° 2.092° 2.617` 2.856d

R Squared 0.068 0.05 0.094 0.11

No. of Observations 85 85 68 68

°significant t007

°significant 0.018

`significant v.004

dsignificant 0.002

25

Table 4

Abnormal Returns: Monopoly &

Others Portfolios

Relative

Month

Monopoly

AbnormalReturn

Portfolio:

CAR

N = 17

Cross-

sectionalVariance

Others

Abnormal

Return

Portfolio:

CAR

N = 68

Cross-

sectionalVariance

-12 0.0049 0.0049 0.0040 -0.0061 -0.0061 0.0066

-11 -0.0064 -0.0015 0.0043 0.0255 0.0194 0.0105

-10 -0.0006 -0.0021 0.0022 0.0054 0.0248 0.0081

-9 0.0049 0.0028 0.0024 -0.0058 0.0190 0.0088

-8 -0.0141 -0.0113 0.0015 0.0123 0.0313 0.0069

-7 -0.0089 -0.0202 0.0024 0.0111 0.0424 0.0076

-6 0.0068 -0.0133 0.0061 -0.0231 0.0194 0.0099

-5 -0.0006 -0.014 0.0038 -0.0049 0.0145 0.0103

-4 0.0110 -0.0029 0.0032 -0.0011 0.0134 0.0130

-3 -0.0166 -0.0195 0.0065 0.0008 0.0142 0.0058

-2 0.0198 0.0002 0.0038 0.0076 0.0218 0.0069

-1 0.0132 0.0134 0.0029 0.0088 0.0306 0.0061

0 0.0027 0.0161 0.0029 0.0142 0.0448 0.0071

26

•----11.-----./

i

0.01 r

0.000 -

0 0

-0.000 ■

t■-• r2

■

■

i1ra -0

Figure 1CAR: Full Sample

0 . 04 §

secutrria

27

Figure 2CAR: Monopoly and Others Portfolios

Wean ii:rrs:

--0.03 ...

INIONTI4

28

86/01 Arnoud DE MEYER

86/02 Philippe A. NAERTMarcel WEVERBERGHand Guido VERSVIJVEL

86/03 Michael BRIM

86/04 Spyros MAKRIDAKISand Michele NIHON

86/05 Charles A. VYPLOSZ

86/06 Francesco GIAVAllI,Jeff R. SHEEN andCharles A. VYPLOSZ

86/07 Douglas L. MacLACHLANand Spyros MAKRIDAKIS

86/08 Jose de la TORRE andDavid H. NECKAR

86/09 Philippe C. HASPESLAGH

86/10 R. MOENART,Arnoud DE MEYER,J. BARGE andD. DESCHOOLMEESTER.

86/11 Philippe A. NAERTand Alain BULTEZ

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86/13 S.P. ANDERSONand Damien J. NEVEN

86/14 Charles WALDMAN

86/15 Mihkel TOMBAK andArnoud DE MEYER

"The R 6 D/Production interface".

"Subjective estimation in integratingcommunication budget and allocationdecisions: a case study", January 1986.

"Sponsorship and the diffusion oforganizational innovation: a preliminary view".

"Confidence intervals: an empiricalinvestigation for the series in the M-Competition" .

"A note on the reduction of the vorkveek",July 1985.

"The real exchange rate and the fiscalaspects of a natural resource discovery",Revised version: February 1986.

"Judgmental biases in sales forecasting",February 1986.

"Forecasting political risks forinternational operations", Second Draft:March 3, 1986.

"Conceptualizing the strategic process indiversified firms: the role and nature of thecorporate influence process", February 1986.

"Analysing the issues concerningtechnological de-maturity".

"Prom "Lydiametry" to "Pinkhamization":misspecifying advertising dynamics rarelyaffects profitability".

"The economics of retail firms", RevisedApril 1986.

"Spatial competition a la Cournot".

"Comparaison internationale des marges brutesdu commerce", June 1985.

"How the managerial attitudes of firms withFMS differ from other manufacturing firms:survey results", June 1986.

"Les primes des offres publiques, la noted'information et le marchó des transferts decontrOle des societW.

"Strategic capability transfer in acquisitionintegration", May 1986.

"Towards an operational definition ofservices", 1986.

"Nostradamus: a knovledge-based forecastingadvisor".

"The pricing of equity on the London stockexchange: seasonality and size premium",June 1986.

"Risk-premia seasonality in D.S. and Europeanequity markets", February 1986.

"Seasonality in the risk-return relationshipssome international evidence", July 1986.

"An exploratory study on the integration ofinformation systems in manufacturing",July 1986.

"A methodology for specification andaggregation in product concept testing",July 1986.

"Protection", August 1986.

"The economic consequences of the FrancPoincare", September 1986.

"Negative risk-return relationships inbusiness strategy: paradox or truism?",October 1986.

"Interpreting organizational texts.

"Why follow the leader?".

"The succession game: the real story.

"Flexibility: the next competitive battle",October 1986.

"Flexibility: the next competitive battle",Revised Version: March 1987

INSEAD WORKING PAPERS SERIES

1986

86/16 B. Espen ECKRO andHerwig M. LANGOHR

86/17 David B. JEMISON

86/18 James TEBOULand V. MALLERET

86/19 Rob R. VEIT2

86/20 Albert CORHAY,Gabriel HAVAVINIand Pierre A. MICHEL

86/21 Albert CORHAY,Gabriel A. HAVAVINIand Pierre A. MICHEL

86/22 Albert CORHAY,Gabriel A. HAVAVINIand Pierre A. MICHEL


86/24 David GAUTSCHIand Vithala R. RAO

86/25 H. Peter GRAYand Ingo WALTER

86/26 Barry EICHENGREENand Charles VYPLOSZ

86/27 Karel COOLand Ingemar DIERICKX

86/28 Manfred KETS DEVRIES and Danny MILLER

86/29 Manfred KETS DE VRIES



86/31 Arnoud DE MEYER,Jinichiro NAKANE,Jeffrey G. MILLERand Kasra FERDOWS

86/32 Karel COOL

Performance differences among strategic groupand Dan SCHENDEL members", October 1986.

86/33 Ernst BALTENSPERGERand Jean DERMINE

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86/35 Jean DERMINE

86/36 Albert CORHAY andGabriel HAVAVINI

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1987


87/02 Claude VIALLET

87/03 David GAUTSCHIand Vithala RAO

87/04 Sumantra GHOSHAL andChristopher BARTLETT

87/05 Arnoud DE MEYERand Kasra FERDOVS

"The role of public policy in insuringfinancial stability: a cross-country,comparative perspective", August 1986, RevisedNovember 1986.

"Acquisitions: myths and reality",July 1986.

"Measuring the market value of a bank, aprimer", November 1986.

"Seasonality in the risk-return relationship:some international evidence", July 1986.

"The evolution of retailing: a suggestedeconomic interpretation".

"Financial innovation and recent developmentsin the French capital markets", Updated:September 1986.

"The pricing of common stocks on the Brusselsstock exchange: a re-examination of theevidence", November 1986.

"Capital flows liberalization and the EMS, aFrench perspective", December 1986.

"Manufacturing in a new perspective",July 1986.

"EMS as indicator of manufacturing strategy",December 1986.

"On the existence of equilibrium in hotelling'smodel", November 1986.

"Value added tax and competition",December 1986.

"Prisoners of leadership".

"An empirical investigation of internationalasset pricing", November 1986.

"A methodology for specification andaggregation in product concept testing",Revised Version: January 1987.

"Organizing for innovations: case of themultinational corporation", February 1987.

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"Customer loyalty as a construct in themarketing of banking services", July 1986.

"Equity pricing and stock market anomalies",February 1987.

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"Multinational corporations as differentiatednetvorks", April 1987.

"Product Standards and Competitive Strategy: AnAnalysis of the Principles", May 1987.

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"Managers' cognitive maps for upward anddownward relationships", June 1987.

"Patents and the European biotechnology lag: astudy of large European pharmaceutical firms",June 1987.

"Why the EMS? Dynamic games and the equilibriumpolicy regime, May 1987.

"A new approach to statistical forecasting",June 1987.

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87/06 Arun K. JAIN,Christian PINSON andNaresh K. MALHOTRA

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"The internal and external careers: atheoretical and cross-cultural perspective",Spring 1987.

"The robustness of MDS configurations in theface of incomplete data", March 1987, Revised:July 1987.

"Demand complementarities, household productionand retail assortments", July 1987.

"Is there a capital shortage in Europe?",August 1987.

"Controlling the interest-rate risk of bonds:an introduction to duration analysis andimmunization strategies", September 1987.

"Interpreting strategic behavior: basicassumptions themes in organizations", September1987

87/41 Gavriel HAVAVINI andClaude VIALLET

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87/43 Jean GABSZEVICZ andJacques-F. THISSE

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"Combining horizontal and verticaldifferentiation: the principle of max-mindifferentiation", December 1987

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"Spatial discrimination: Bertrand vs. Cournotin a model of location choice", December 1987

"Business strategy, market structure and risk-return relationships: a causal interpretation",December 1987.

"Asset stock accumulation and sustainabilityof competitive advantage", December 1987.

87/30 Jonathan HAMILTON "Spatial competition and the Core", August

W. Bentley MACLEOD 1987. 1988and J. F. THISSE

87/31 Martine OUINZII andJ. F. THISSE


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87/37 Landis GABEL


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"European manufacturers: the dangers ofcomplacency. Insights from the 1987 Europeanmanufacturing futures survey, October 1987.

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"Privatization: its motives and likelyconsequences", October 1987.

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88/01 Michael LAVRENCE andSpyros MAKRIDAKIS


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"Predicting recessions and other turningpoints", January 1988.

"De-industrialize Service for quality", January1988.

"National vs. corporate culture: implicationsfor human resource management", January 1988.

"The swinging dollar: is Europe out of step?",January 1988.

"Les conflits dans les canaux de distribution",January 1988.

"Competitive advantage: a resource basedperspective", January 1988.

"Issues in the study of organizationalcognition", February 1988.

"Price formation and product design throughbidding", February 1988.

"The robustness of some standard auction gameforms", February 1988.

"When stationary strategies are equilibriumbidding strategy: The single-crossingproperty", February 1988.

87/36 Manfred KETS DE VRIES "Prisoners of leadership", Revised versionOctober 1987.

87/39 Manfred KETS DE VRIES "The dark side of CEO succession", November1987



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88/26 Sjur Didrik FLAMand Georges ZACCOUR

88/27 Murugappa KRISHNANLars-Hendrik ROLLER

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"Alexithymia in organizational life: theorganization man revisited", February 1988.

"The interpretation of strategies: a study ofthe impact of CEOs on the corporation",March 1988.

"The production of and returns from industrialinnovation: an econometric analysis for adeveloping country", December 1987.

"Market efficiency and equity pricing:international evidence and implications forglobal investing", March 1988.

"Monopolistic competition, costs of adjustmentand the behavior of European employment",September 1987.

"Reflections on "Wait Unemployment" inEurope", November 1987, revised February 1988.

"Individual bias in judgements of confidence",March 1988.

"Portfolio selection by mutual funds, anequilibrium model", March 1988.

"De-industrialize service for quality",March 1988 (88/03 Revised).

"Proper Quadratic Functions with an Applicationto AT&T", May 1987 (Revised March 1988).

"Equilibres de Nash-Cournot dans le march6europeen du gaz: un cas o6 les solutions enboucle ouverte et en feedback coincident",Mars 1988

"Information disclosure, means of payment, andtakeover premia. Public and Private tenderoffers in France", July 1985, Sixth revision,April 1988.

"The future of forecasting", April 1988.

"Semi-competitive Cournot equilibrium inmultistage oligopolies", April 1988.

"Entry game with resalable capacity",April 1988.

88/29 Naresh K. MALHOTRA,Christian PINSON andArun K. JAIN

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"The financial fallout from Chernobyl: riskperceptions and regulatory response", May 1988.

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"International manufacturing: positioningplants for success", June 1988.

"The importance of flexibility inmanufacturing", June 1988.

"Flexibility: an important dimension inmanufacturing"

"A strategic analysis of investment in flexiblemanufacturing systems", July 1988.

"A Predictive Test of the NBD Model thatControls for Non-stationarity", June 1988.

"Regulating Price-Liability Competition ToImprove Welfare", July 1988.

"The Motivating Role of Envy : A ForgottenFactor in Management, April 88.

"The Leader as Mirror : Clinical Reflections",July 1988.

"Anomalous price behavior around repurchasetender offers", August 1988.

"Assymetry in the EMS: intentional orsystemic?", August 1988.

"Organizational development in thetransnational enterprise", June 1988.

"Group decision support systems implementBayesian rationality", September 1988.

"The state of the art and future directionsin combining forecasts", September 1988.

"An empirical investigation of internationalasset pricing", November 1986, revised August1988.

"From intent to outcome: a process frameworkfor partnerships", August 1988.

, June 1988.

88/28 Sumantra G8OSHAL and

"The multinational corporation as a network:C. A. BARTLETT

perspectives from interorganizational theory",May 1988.

88/47 Alain BULTEZ,Els GIJSBRECHTS,Philippe NAERT andPiet VANDEN ABEELE

88/48 Michael BURDA

88/49 Nathalie DIERKENS

88/50 Rob WEITZ andArnoud DE MEYER

88/51 Rob VEITZ

88/52 Susan SCHNEIDER andReinhard ANGELMAR


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88/55 Peter BOSSAERTSand Pierre HILLION

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88/58 B. SINCLAIR-DESGAGNEand Mihkel M. TOMBAK

88/59 Martin KILDUFF

88/60 Michael BURDA

88/61 Lars-Hendrik ROLLER

88/62 Cynthia VAN HULLE,Theo VERMAELEN andPaul DE WOUTERS

"Asymmetric cannibalism between substituteitems listed by retailers", September 1988.

"Reflections on 'Wait unemployment' inEurope, II", April 1988 revised September 1988.

"Information asymmetry and equity issues",September 1988.

"Managing expert systems: from inceptionthrough updating", October 1987.

"Technology, work, and the organization: theimpact of expert systems", July 1988.

"Cognition and organizational analysis: who'sminding the store?", September 1988.

"Whatever happened to the philosopher-king: theleader's addiction to power, September 1988.

"Strategic choice of flexible productiontechnologies and welfare implications",October 1988

"Method of moments tests of contingent claimsasset pricing models", October 1988.

"Size-sorted portfolios and the violation ofthe random walk hypothesis: Additionalempirical evidence and implication for testsof asset pricing models", June 1988.

"Data transferability: estimating the responseeffect of future events based on historicalanalogy", October 1988.

"Assessing economic inequality", November 1988.

"The interpersonal structure of decisionmaking: a social comparison approach toorganizational choice", November 1988.

"Is mismatch really the problem? Some estimatesof the Chelvood Gate II model with US data",September 1988.

"Modelling cost structure: the Bell Systemrevisited", November 1988.

"Regulation, taxes and the market for corporatecontrol in Belgium", September 1988.

88/63 Fernando NASCIMENTOand Vilfried R.VANHONACKER

88/64 Kasra FERDOVS

88/65 Arnoud DE MEYERand Kasra FERDOWS

88/66 Nathalie DIERKENS

88/67 Paul S. ADLER andKasra FERDOWS

1989

89/01 Joyce K. BYRER andTavfik JELASSI

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89/04 Kasra FERDOWS andArnoud DE MEYER

89/05 Martin KILDUFF andReinhard ANGELMAR

89/06 Mihkel M. TOMBAK andB. SINCLAIR-DESGAGNE

89/07 Damien J. NEVEN

89/08 Arnoud DE MEYER andHellmut SCHUTTE

89/09 Damien NEVEN,Carmen MATUTES andMarcel CORSTJENS

89/10 Nathalie DIERKENS,Bruno GERARD andPierre MILLION

"Strategic pricing of differentiated consumerdurables in a dynamic duopoly: a numericalanalysis", October 1988.

"Charting strategic roles for internationalfactories", December 1988.

"Quality up, technology down", October 1988.

"A discussion of exact measures of informationassymetry: the example of Myers and Majlufmodel or the importance of the asset structureof the firm", December 1988.

"The chief technology officer", December 1988.

"The impact of language theories on DSSdialog", January 1989.

"DSS software selection: a multiple criteriadecision methodology", January 1989.

"Negotiation support: the effects of computerintervention and conflict level on bargainingoutcome", January 1989."Lasting improvement in manufacturingperformance: In search of a new theory",January 1989.

"Shared history or shared culture? The effectsof time, culture, and performance oninstitutionalization in simulatedorganizations", January 1989.

"Coordinating manufacturing and businessstrategies: I", February 1989.

"Structural adjustment in European retailbanking. Some view from industrialorganisation", January 1989.

"Trends in the development of technology andtheir effects on the production structure inthe European Community", January 1989.

"Brand proliferation and entry deterrence",February 1989.

"A market based approach to the valuation ofthe assets in place and the growthopportunities of the firm", December 1988.

89/11 Manfred KETS DE VRIESand Alain NOEL

89/12 Wilfried VANHONACKER




89/16 Wilfried VANHONACKER,Donald LEHMANN andFareena SULTAN

89/17 Gilles AMADO,Claude FAUCHEUX andAndre LAURENT

89/18 Srinivasan BALAK-RISHNAN andMitchell KOZA

89/19 Wilfried VANHONACKER,Donald LEHMANN andFareena SULTAN

89/20 Wilfried VANHONACKERand Russell WINER

89/21 Arnoud de MEYER andKasra FERDOWS

89/22 Manfred KETS DE VRIESand Sydney PERZOW

89/23 Robert KORAJCZYK andClaude VIALLET

89/24 Martin KILDUFF andMitchel ABOLAFIA

89/25 Roger BETANCOURT andDavid GAUTSCHI

89/26 Charles BEAN,Edmond MALINVAUD,Peter BERNHOLZ,Francesco GIAVAllIand Charles WYPLOSZ

"Understanding the leader-strategy interface:application of the strategic relationshipinterview method", February 1989.

"Estimating dynamic response models when thedata are subject to different temporalaggregation", January 1989.

"The impostor syndrome: a disquietingphenomenon in organizational life", February1989.

"Product innovation: a tool for competitiveadvantage", March 1989.

"Evaluating a firm's product innovationperformance", March 1989.

"Combining related and sparse data in linearregression models", February 1989.

"Changement ouganisationnel et realnessculturelles: contrastes franco-americains",March 1989.

"Information asymmetry, market failure andjoint-ventures: theory and evidence",March 1989

"Combining related and sparse data in linearregression models",Revised March 1989

"A rational random behavior model of choice",Revised March 1989

"Influence of manufacturing improvementprogrammes on performance", April 1989

"What is the role of character inpsychoanalysis? April 1989

"Equity risk premia and the pricing of foreignexchange risk" April 1989

"The social destruction of reality:Organisational conflict as social drama"April 1989

"Two essential characteristics of retailmarkets and their economic consequences"March 1989

"Macroeconomic policies for 1992: thetransition and after", April 1989

89/27 David KRACKHARDT andMartin KILDUFF


89/29 Robert GOGEL andJean-Claude LARRECHE

89/30 Lars-Hendrik ROLLERand Mihkel M. TOMBAK

89/31 Michael C. BURDA andStefan GERLACH

89/32 Peter HAUG andTawfik JELASSI

89/33 Bernard SINCLAIR-DESGAGNE

89/34 Sumantra GHOSHAL andNittin NOHRIA

89/35 Jean DERMINE andPierre BILLION



89/38 Manfrd KETS DE VRIES

89/39 Robert KORAJCZYK andClaude VIALLET

89/40 Balaji CHAKRAVARTHY

89/41 B. SINCLAIR-DESGAGNEand Nathalie DIERKENS

89/42 Robert ANSON andTawfik JELASSI

89/43 Michael BURDA

89/44 Balaji CHAKRAVARTHYand Peter LORANGE

89/45 Rob WEITZ andArnoud DE MEYER

"Friendship patterns and cultural attributions:the control of organizational diversity",April 1989

"The interpersonal structure of decisionmaking: a social comparison approach toorganizational choice", Revised April 1989

"The battlefield for 1992: product strengthand geographic coverage", May 1989

"Competition and Investment in FlexibleTechnologies", May 1989

"Intertemporal prices and the US trade balancein durable goods", July 1989

"Application and evaluation of a multi-criteriadecision support system for the dynamicselection of U.S. manufacturing locations",May 1989

"Design flexibility in monopsonisticindustries", May 1989

"Requisite variety versus shared values:managing corporate-division relationships inthe M-Form organisation", May 1989

"Deposit rate ceilings and the market value ofbanks: The case of France 1971-1981", May 1989

"A dispositional approach to social networks:the case of organizational choice", May 1989

"The organisational fool: balancing a leader'shubris", May 1989

"The CEO blues", June 1989

"An empirical investigation of internationalasset pricing", (Revised June 1989)

"Management systems for innovation andproductivity", June 1989

"The strategic supply of precisions", June 1989

"A development framework for computer--supportedconflict resolution", July 1989

"A note on firing costs and severance benefitsin equilibrium unemployment", June 1989

"Strategic adaptation in multi-business firms",June 1989

"Managing expert systems: a framework and casestudy", June 1989

89/46 Marcel CORSTJENS,Carmen MATUTES andDamien NEVEN

89/47 Manfred KETS DE VRIESand Christine MEAD

89/48 Damien NEVEN andLars-Hendrik ROLLER

89/49 Jean DERMINE

89/50 Jean DERMINE




"Entry Encouragement", July 1989

"The global dimension in leadership andorganization: issues and controversies",April 1989

"European integration and trade flows",August 1989

"Home country control and mutual recognition",July 1989

"The specialization of financial institutions,the EEC model", August 1989

"Sliding simulation: a new approach to timeseries forecasting", July 1989

"Shortening development cycle times: amanufacturer's perspective", August 1989

"Why combining works?", July 1989

"Complexity of simulation models: A graphtheoretic approach". November 1989

"MARS: A mergers and acquisitions reasoningsystem", November 1989

"On the regulation of procurement bids",November 1989

"Market microstructure effects of governmentintervention in the foreign exchange market",December 1989

89/64 Enver YUCESAN and(TM) Lee SCHRUBEN

89/65 Soumitra DUTTA and(TM, Piero BONISSONEAC, PIN)

89/66 B. SINCLAIR-DESGAGNE(TM,EP)

89/67 Peter BOSSAERTS and(PIN) Pierre HILLION

89/54 S. BALAKRISHNANand Mitchell KOZA

89/55 H. SCHUTTE

89/56 Wilfried VANHONACKERand Lydia PRICE

89/57 Taekvon KIM,Lars-Hendrik ROLLERand Mihkel TOMBAK

89/58 Lars-Hendrik ROLLER(EP,TM) and Mihkel TOMBAK

89/59 Manfred KETS DE VRIES,(OB) Daphna ZEVADI,

Alain NOEL andMihkel TOMBAK

89/60 Enver YUCESAN and(TN) Lee SCHRUBEN

89/61 Susan SCHNEIDER and(All) Arnoud DE MEYER

89/62 Arnoud DE MEYER(TM)

89/63 Enver YUCESAN and(TM) Lee SCHRUBEN

"Organisation costs and a theory of jointventures", September 1989

"Euro-Japanese cooperation in informationtechnology", September 1989

"On the practical usefulness of meta-analysisresults", September 1989

"Market growth and the diffusion ofmultiproduct technologies", September 1989

"Strategic aspects of flexible productiontechnologies", October 1989

"Locus of control and entrepreneurship: athree-country comparative study", October 1989

"Simulation graphs for design and analysis ofdiscrete event simulation models", October 1989

"Interpreting and responding to strategicissues: The impact of national culture",October 1989

"Technology strategy and international R 6 Doperations", October 1989

"Equivalence of simulations: A graph theoreticapproach", November 1989

1990

B. SINCLAIR-DESGAGNE "Unavoidable Mechanisms', January 1990

90/16FIN

90/17

FIN

Richard LEVICH andIngo WALTER

Nathalie DIERKENS

"Tax-Driven Regulatory Drag: EuropeanFinancial Centers in the 1990's", January 1990

"Information Asymmetry and Equity Issues",Revised January 1990

90/01TM/EP/AC

90/02 Michael BURDA "Monopolistic Competition, Costs of

EP Adjustment, and the Behaviour of European 90/18 Vilfried VANHONACKER "Managerial Decision Rules and the EstimationManufacturing Employment", January 1990 MKT of Dynamic Sales Response Models", Revised

January 199090/03 Arnoud DE MEYER "Management of Communication in International

TM Research and Development", January 1990 90/19 Beth JONES and "The Effect of Computer Intervention and Task

90/04FIN/EP

Gabriel HAVAVINI and "The Transformation of the European Financial

Eric RAJENDRA Services Industry: From Fragmentation to

TM Tavfik JELASSI Structure on Bargaining Outcome", February1990

Integration", January 1990

90/05 Gabriel HAVAVINI and "European Equity Markets: Toward 1992 and

90/20TM

Tavfik JELASSI,Gregory KERSTEN and

"An Introduction to Group Decision andNegotiation Support", February 1990

FIN/EP Bertrand JAGOUILLAT Beyond", January 1990 Stanley ZIONTS

90/06 Gabriel HAVAVINI and "Integration of European Equity Markets: 90/21 Roy SMITH and "Reconfiguration of the Global Securities

FIN/EP Eric RAJENDRA Implications of Structural Change for Key FIN Ingo WALTER Industry in the 1990's", February 1990Market Participants to and Beyond 1992",

January 1990 90/22 Ingo WALTER "European Financial Integration and ItsFIN Implications for the United States", February

90/07 Gabriel HAVAVINI "Stock Market Anomalies and the Pricing of 1990FIN/EP Equity on the Tokyo Stock Exchange", January

1990 90/23 Damien NEVEN "EEC Integration towards 1992: Some

90/08 Tavfik JELASSI and "Modelling with MCDSS: Vhat about Ethics?",EP/SM Distributional Aspects", Revised December 1989

TM/EP B. SINCLAIR-DESGAGNE January 1990 90/24 Lars Tyge NIELSEN "Positive Prices in CAPM", January 1990FIN/EP

90/09EP/FIN

Alberto GIOVANNINI "Capital Controls and International Tradeand Jae VON PARK Finance", January 1990

90/25 Lars Tyge NIELSEN "Existence of Equilibrium in cAPM", January

90/10 Joyce BRYER and "The Impact of Language Theories on DSS FIN/EP 1990

TM Tavfik JELASSI Dialog", January 199090/26 Charles KADUSHIN and "Why networking Pails: Double Binds and the

90/11TM

Enver YUCESAN "An Overview of Frequency Domain Methodology

for Simulation Sensitivity Analysis",January 1990

0B/BP

90/27

Michael BRINE

Abbas FOROUCHI and

Limitations of Shadow Networks", February 1990

"NSS Solutions to Major Negotiation Stumbling

90/12

EF

Michael BURDA "Structural Change, Unemployment Benefits and

nigh Unemployment: A U.S.-EuropeanComparison", January 1990

TM

90/28

TM

Tavfik JELASSI

Arnoud DE MEYER

Blocks", February 1990

"The Manufacturing Contribution to

Innovation". February 1990

90/13 Soumitra DUTTA and "Approximate Reasoning about Temporal

TM Shashi SHEKHAR Constraints in Real Time Planning and Search',

January 1990

90/29

FIN/ACNathalie DIERKENS "A Discussion .7 1- Correct Measures of

Information Asymmetry", January 1990

90/14 Albert ANGEHRN and "Visual Interactive Modelling and Intelligent 90/30 Lars Tyge NIELSEN "The Expected Utility of Portfolios of

TM Hans-Jakob LOTHI DSS: Putting Theory Into Practice",January 1990

FIN/EP Assets". March 1990

90/15 Arnoud DE MEYER, "The Internal Technological Renewal of a 90/31 David CAUTSCHI and "What Determines U.S. Retail Margins?",TM Dirk DESCHOOLMEESTER, Business Unit With a Mature Technology",

Rudy MOENAERT and January 1990MKT/EP Roger BETANCOURT February 1990

Jan BARBE

INFORMATION ASYMMETRY, AWERSES SELECTION THEORY …

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