The Impact of Partnership Network on Corporate Policy

Abstract

This paper examines the impact of corporate alliances on corporate investment decisions in a network setting. Well-connected firms are centrally located in alliance networks. I hypothesize that more centrally located firms are exposed to greater information flows through the networks and, therefore, possess informational advantages. The informational advantages of central firms allow them to rely less on the information in their stock prices for making investment decisions. Supporting this hypothesis, firms with a higher centrality exhibit lower investment-to-price sensitivity. This finding is robust to a variety of network centrality measures and endogeneity in alliance formations. Notably, the effect of centrality is not the same across alliance types. More integrated forms of alliances including joint ventures, technology transfer, R&D agreements, and manufacturing agreements seem to exert a stronger influence on the investment-to-price sensitivity. In fact, only the centrality based on these alliances shows a positive impact on both market valuations and announcement effects, suggesting that these alliance networks likely convey value-enhancing information. Overall, my results show that alliance networks are conduits of information that impact corporate investment decisions.