||Value of Strategic Alliances：Evidence from the Cost of Equity
||Institute of International Business
Cost of Equity
The objective of this study is to examine the relationship between strategic alliances and cost of equity. I hypothesize that the participation of strategic alliances lowers a firm’s cost of equity because of three functions of strategic alliances, including stability of firm’s future profit, reduction in information asymmetry and creating synergy effect. I obtain strategic alliance data for the period 2000–2009 from the Security Data Corporation’s (SDC). My supplementary data are collected from the Center for Research in Security Prices (CRSP) and Compustat. To calculate the cost of equity, I measure changes in the systematic risk of equity based on the market model and the three-factor model. Based on 4,128 alliances, I find that strategic alliances firms experience a significant decline in systematic risk relative to their peer firms. Furthermore, we find that the effect of strategic alliance is stronger for firms located in the high-tech industries, experiencing tighter financial constraints and facing stronger product market competition.
1. Introduction 1
1.1 Background and Motivation 1
1.2 Research Questions 4
1.3 Contribution 5
2. Literature review and Hypotheses Development 7
2.1 Strategic Alliances 7
2.2 Benefits of Strategic Alliances 8
2.3 Cost of Equity 10
2.4 Strategic Alliances and Cost of Equity 11
2.5 Strategic Alliances, Firm situational constraints and Cost of Equity 13
3. Data and Research Design 16
3.1 Data and Sample Selection 16
3.2 Estimation of the Cost of Equity 16
3.3 Control Variables 18
3.4 Model Specification 19
3.5 Variables Measurement 22
4. Empirical Results 23
4.1 Descriptive Statistics 24
4.2 Effect of strategic alliances on cost of equity 25
4.3 Firm situational constraints and risk change 28
5. Conclusions 32
5.1 Discussion 32
5.2 Managerial Implication 33
5.3 Limitation and Future Research 33
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