The effect of pre‐existing financial indicators on investor valuation of strategic alliances

Abstract

Purpose -The purpose of this paper is to extend the line of research on the ex ante valuation of the economic payoff from strategic alliances. The paper links a firm's related pre-alliance situation to an alliance announcement, to predict how investors value the alliance. Design/methodology/approach -The researchers collected data on marketing alliances in the biotechnology and pharmaceutical industries. Using an empirical model, three hypotheses predicting how investors value alliances in the light of their knowledge of how the firm is doing before the alliance announcement were tested. Findings -The findings indicate that investors assign higher value to marketing alliances for firms with lower inventory liquidity and product demand. Investors, in fact, rewarded firms with weak pre-alliance positions, indicating that the alliance was perceived as a useful strategy to turnaround the weak situation. Research limitations/implications -As is common with other event study research, the study is unable to predict the long-term relationship between alliance announcements and performance of the alliance. A positive evaluation at the time of the announcement may not necessarily translate into long-term success. Practical implications -This research provides an important lesson for firms hoping to reap financial rewards from their alliance announcements. Firms may do well to time such alliance announcements to correspond with their internal situations. Originality/value -This paper is believed to be one of the first to consider an additional piece of firm information in addition to an alliance announcement to gauge investor valuation of alliances. The research therefore extends existing research and offers a more complete understanding of how investors value alliances at their formation. The findings should be of interest to firms contemplating alliances, and enhance understanding of investor decision making.