Myopic capital market concerns and investment incentives in business alliances

Author(s)

Hui Chen, Thomas Pfeiffer

Abstract

We study a publicly traded firm that cares about its short-term stock market performance while collaborating with a privately owned firm in a business alliance. The firms each undertake a relation-specific investment and then bargain over the allocation of the joint surplus generated by the alliance. The public firm’s myopic market concerns affect both the total size of the surplus and how the firms divide the surplus. While the public firm always becomes more aggressive and obtains more of the surplus, the total size of the surplus may become larger or smaller, due to the effect of myopic market concerns on the firms’ investment incentives. We establish conditions under which the investment and the value of each firm increase or decrease with market concerns. The market concerns could mitigate or exacerbate the hold-up problem between the two firms and thus could either benefit or harm the whole business alliance. We also study two extensions with (i) the two investments being substitutes instead of complements and (ii) both firms being publicly listed. In both cases, the insights from our main model still hold.

Organisation(s)

Department of Accounting, Innovation and Strategy

External organisation(s)

Universität Zürich (UZH)

Journal

Review of Accounting Studies

Volume

29

Pages

2518-2550

No. of pages

33

ISSN

1380-6653

DOI

https://doi.org/10.1007/s11142-023-09755-y

Publication date

01-2023

Peer reviewed

Yes

Austrian Fields of Science 2012

502052 Business administration, 502006 Controlling

Keywords

ASJC Scopus subject areas

Accounting, General Business,Management and Accounting

Portal url

https://ucrisportal.univie.ac.at/en/publications/60d87494-dce0-4848-bdae-b659f4f55560