Financial Health and Partner Attractiveness in the Market for Inter-Firm Collaboration

Abstract

We propose that in addition to its resources and capabilities, a firm's capital structure and financial health will act as an important determinant of its attractiveness as an alliance partner. Alliances with leveraged firms are prone to unplanned termination due to financial distress, which puts at risk the value embedded in the collaboration. As a result, ceteris paribus, highly leveraged firms will be viewed as less desirable partners in the market for interfirm collaboration when compared to low leverage firms. In support of this proposition, we find that when forming an alliance firms tend to partner with other firms with similar levels of leverage: low-leverage firms partner with other low-leverage firms while highleverage firms partner with other high-leverage firms, as well as with lower quality ones. Furthermore, we show that alliances with highly leveraged firms are more likely to involve equity participation as a form