Diversification, Partner Relatedness, and Shareholder Value of International Joint Ventures

Abstract

This paper presents new evidence on the impact of industrial diversification and partner business relatedness on the shareholder wealth effects of international joint ventures (IJVs). By employing a comprehensive database containing worldwide joint venture announcements, we examine the shareholder value of 1042 international joint venture (IJV) announcements made by US firms from 1999-2008. In general, there is significant evidence that shareholders of US partners announcing IJV investments in foreign countries realize positive abnormal returns. Further analysis demonstrates that IJVs invested outside of the core businesses of both US and foreign partners and formed by partners with different core businesses are most value-increasing for US shareholders. In contrast to the previous literature that indicates corporate diversification is linked to the destruction of shareholder value, our results show that diversification through IJV investments increases shareholder value of US partners, and partner business unrelatedness can further enhance value creation from diversification. The diversification premium found in this paper also provides some supporting evidence that the international joint venture may be a preferred mode over international acquisitions and Greenfield FDI when US firms engage in foreign direct investments (FDI) outside of their core businesses.