Disentangling the Roles of Equity Market and Strategic Alliances in M&As: Valuation and Search Problems

Abstract

Information economics offers a complementary framework relative to transaction cost economics to study corporate strategy. Nevertheless, the existing theory suffers from the lack of an argument to differentiate various remedies for contractual hazards when multiple remedies are available. We develop the argument that although both publicity via equity market and strategic alliances can serve as remedies for the asymmetric information problem in M&As, the different mechanisms underlying the two remedies suggest that only equity market is capable of overcoming the search problem in M&As. Consistent with the argument, the empirical evidence shows that firms rely on equity market and strategic alliances to mitigate the valuation problem associated with acquisitions of highly intangible targets. However, firms tend to use the equity market rather than strategic alliances to address the search problem associated with high spatial dispersion of exchange partners.