The Valuation Effects of Initiations and Terminations of Joint Ventures.

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This dissertation examines the valuation effects of initiations and terminations of joint ventures formed by two partners. The evidence indicates that there is an increase in value for both partners at joint venture initiations and that these gains are greater for small partners than for the large partners. The pattern of the gains to partners is consistent with the certification value of the inter-corporate relationship intrinsic to a joint venture. Moreover, an analysis of the operating performance after the initiation of joint ventures indicates that there is no significant improvement in operating performance of the partner firms relative to benchmark firms after the initiation of the joint venture. Thus, there is no evidence that the share price gains at the joint venture announcement reflect market expectations of future synergistic gains. Joint ventures are also analyzed as a vehicle that can facilitate a sale of assets and as a mechanism to obtain external financing for a project. The results indicate that when partners (sellers) contribute assets to the joint venture while their partners (buyers) provide liquidity to the joint venture or pay cash directly to the selling partners, the transaction serves as a substitute for a direct asset sale and generates greater gains for selling firms. The impact of industry characteristics of the partners participating in the joint venture is also examined. The results indicate that firms experience greater gains when both partners in a joint venture are in the same industry. This finding suggests that partners that both possess information about the same industry serve as more effective monitors. Partners in vertical joint ventures do not experience different valuation effects than those sustained by partners in non-vertical joint ventures. The valuation effects of announcements of terminations of joint venture are analyzed. The results indicate that there are no statistically significant wealth effects to partners at the termination of joint ventures, a result that suggests that these events are likely to be well anticipated. Overall, the pattern of the wealth effects is consistent with the presence of valuable monitoring and certification activities between the partners in a joint venture.