Measuring the Value of Strategic Alliances in the Wake of a Financial Implosion: Evidence from Japan's Financial Services Sector

Abstract

This paper examines the wealth effects of financial-institution strategic alliances on the shareholders of the newly allied firms. Our paper is different from previous studies of non-financial joint ventures, financial and non-financial mergers and acquisitions, and non-financial strategic alliances in three important aspects/ways: First, we focus on financial institutions that form strategic alliances. Second, while most related studies use U.S. data, this paper employs Japanese data for the late 1990s, directly testing financial theory in a different setting. Finally, we study whether different types of alliances result in differing magnitudes of stock market responses. Our primary results are as follows: First, we find that a strategic alliance, on average, increases the value of the partner firms. This is consistent with the “synergy” hypothesis. Second, the gains from the alliance are spread more widely among the partners than would be suggested by a random alternative, supporting a “win-win” hypothesis. Third, smaller partners tend to experience larger percentage gains, which is consistent with a “relative size” hypothesis. Fourth, the market values inter-group alliance announcements more than intra-group alliance announcements; the latter may well be seen as redundant. This is consistent with an “inter-group synergies” hypothesis. Fifth, we do not find a significant difference in the abnormal returns showed by domestic-foreign alliances and domestic-domestic alliances, although both sets of alliances show significantly positive returns. We thus do not find support for a “foreign firm superior” hypothesis. Finally, we find that an investment-banking alliance has a strong positive effect on abnormal returns, indicating that investment banking, which has been underdeveloped in Japan relative to the U.S., may be a promising business for financial institutions. Overall, this paper complements the existing literature in that we analyze the value of financial institution alliances. Our analysis reconfirms that strategic alliances are value-enhancing. This is consistent with previous studies that find increased value in the announcement of a strategic alliance or a merger. Our results are consistent with the notion that financial deregulation tends to increase competition, which, in turn, encourages firms to adopt aggressive corporate strategies. This is viewed as a positive move by investors, as evidenced by the average gains of the shareholders of these alliance-forging firms.