Risk and wealth effects of U.S. firm joint venture activity

Abstract

Using a sample of US firms engaged in joint venture activity primarily in the 1990s, we test the hypothesis that joint venture activity is motivated by a desire for efficient risk sharing. We find that approximately ninety-six percent of our sample experiences a risk change in response to joint venture activity. A significant proportion of these experience a reduction in beta. No market price response is evident in conjunction with this reduction. In addition, the average parent firm experiences a significant increase in firm risk, which we attribute to taking on the risky joint venture. This increase in risk is particularly pronounced for firms engaged in international joint ventures and is accompanied by a positive market response. Investment stake, pre-venture firm profitability, size and private risk increasing characteristics appear to influence the wealth character of the joint venture. We interpret that there may be a positive market premium for international diversification effects and/or for the flexibility that the real option joint venture opportunity provides.