Domestic and international joint venture and licensing decisions : effects of location, insider ownership, and firm size

Vita.Joint venture and licensing agreements have emerged as popular substitutes for more traditional means of inter-corporate contracting such as mergers, acquisitions, and asset purchases. A feature which sets these two forms of contracting apart from the others is that firms retain an ownership interest in assets contributed to these activities. They differ from each other in that, with few exceptions, licensing contracts do not change the ownership of the targeted assets, while many joint ventures create shared ownership of the assets devoted to the ventures. The favorable wealth effects associated with asset acquisitions, corporate combinations, and expansion into foreign markets have well established theoretical foundations in Finance. While theoretical models converge on the benefits which may be derived from using licensing and joint venture activities in domestic and foreign markets, the conclusions drawn from the related empirical investigations of joint ventures have not been consistent. Studies by McConnell and Nantell (1985) and Lummer (1983) find that significant gains in stock prices are associated with the establishment of domestic and foreign joint ventures, respectively. Recent studies of foreign joint ventures have combined to yield the ambiguous result that this activity is either wealth-increasing, wealth-decreasing, or wealth neutral for the shareholders of participating firms. Additionally, some of the hypothesized benefits from licensing assets have not been subjected to empirical validation. This study focuses on the response of stock prices to announcements of joint ventures and licensings. It examines stock price changes related to locating these activities in domestic and foreign markets, the purpose of the activity, and the initial cash inflows and outflows of the participating firms. The study includes an analysis of the influences of insider ownership and firm size (market value) on the reaction of stock prices to both types of announcements. The results show that licensing agreements result in significant increases in the market values of participating firms. Neither domestic or foreign joint ventures, in general, have significant wealth effects..