Equity Alliances and the Creation of Shareholder Wealth

We investigate share price responses to announcements of 93 business alliances using minority equity purchases to bond the agreements. On average, selling firms realize significant increases in share value while buying firms garner neutral share price responses. Analysis of financial performance reveals that the buying firms tend to perform above average among their industry peers, while the sellers tend to perform on par with industry norms. Examination of the cross-sectional variation in share price responses revealed that insider ownership is positively correlated with abnormal returns for sellers only where insider holdings exceed 25% of outstanding shares. For buyers, however, abnormal returns increase with increased ownership concentration up to 5%, but decrease as ownership concentration increases from 5% upward. Finally, a third of the alliances in our sample made significant changes in the terms of the agreement during the three years following the formation of the alliance (e.g. strengthening or extending the agreement, reducing the scope of the agreement, or terminating the agreement)