The link between corporate alliances and returns
Strategic alliances are agreements between two or more firms to pursue a set of agreed upon objectives while remaining independent organizations. Alliances are formed for a number of reasons, including licensing, marketing or distribution, development or research, technology transfer or systems integration, or some combination of the above. Tarun Chordia, R. Howard Dobbs professor of finance, and coauthors Jie Cao (Chinese U of Hong Kong) and Chen Lin (U Hong Kong) find evidence of return predictability across alliance partners. If the alliance partner or partners have high (or low) returns this month, then the firm has high (or low) returns over the next two months. Using a sample of alliances over the period 1985 to 2012, the authors find that a long-short portfolio sorted on lagged one-month returns of strategic alliance partners provides a return of over 85 basis points per month. This long-short portfolio return is robust to a number of specifications, including different adjustments for risk, controlling for different proxies for cross-autocorrelations, and excluding partnerships with customer-supplier relationships, as well as controls for industry returns. They theorize, “If investors are fully aware of the impact of strategic alliances on returns and pay attention to the firm-partner links, then the stock price of a firm should quickly adjust to price changes of its partners’ stocks.” The evidence suggests that investor inattention may be the source of a firm’s underreaction to its partners’ returns.