Abstract
We contend that a firm's capital structure will impact a firm's attractiveness as an alliance partner. Alliances with leveraged firms are prone to unplanned termination due to financial distress, which puts at risk the relationship specific investments made by the partner. Hence, highly leveraged firms will be viewed as less desirable partners, and as such they will be constrained to primarily partner with either other highly levered firms or with lower quality ones. Furthermore, we show that alliances with leveraged firms are more likely to involve equity participation as a form of ex post protection for the partner's investments. Finally, we show that leverage is negatively related with the intensity of alliance activity, as firms also maintain lower leverage to attract potential partners.
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