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New evidence on alliance experience and acquisition performance: Short-run pain, long-run gain?

Yiwei Fang (Stuart School of Business, Illinois Institute of Technology, Chicago, Illinois, USA)
Dawei Jin (Information and Safety Engineering School, Zhongnan University of Economics and Law, Wuhan, China)
Xian Sun (Carey Business School. Johns Hopkins University, Baltimore, Maryland, USA)
Haizhi Wang (Stuart School of Business, Illinois Institute of Technology, Chicago, Illinois, USA)

Studies in Economics and Finance

ISSN: 1086-7376

Article publication date: 2 March 2015

Abstract

Purpose

This study aims to build on the organizational learning theory and propose a complex strategy by combining strategic alliance with subsequent acquisitions to penetrate new product markets. The authors empirically examined whether and to what extent preacquisition alliance experience affects the short- and long-term stock performance of acquiring firms.

Design/methodology/approach

Data on acquisitions, in which the acquirers have experience from preacquisition alliance activities in their targets’ respective industry, were collected. Diversifying acquisitions were focused upon to ensure that preacquisition alliance experience is the major source of organizational learning. A standard event study to examine acquirers’ abnormal returns was used and a Fama-French calendar-time portfolio approach to gauge long-run abnormal stock performance was adopted. In addition, regression analysis was conducted to investigate the alliance–acquisition relationship, controlling a set of variables capturing firm and acquisition characteristics.

Findings

It has been documented that in the short run, alliance experience may not always benefit acquirers’ stock performance surrounding the acquisition announcements. In particular, for acquiring firms experiencing negative cumulative abnormal returns, investors value alliance experience negatively. However, for up to 36 months after acquisitions, acquirers with alliance experience outperform their counterparts in almost every acquisition category regardless of the short-term announcement returns.

Originality/value

The current study has used a large-scale representative sample to investigate the dynamic interaction between alliances and acquisitions as two organizational forms for firms to grow. Findings indicate that firms can deliberately learn from their alliance activities and, later on, enter new markets through acquisitions. More importantly, it was found that, at least for some acquirers, preacquisition alliance activities are associated with worse short-term stock price performance because of possible information spillover and lifted entry barriers. It was confirmed that short-term pain nets long-term gains for acquirers heading into new markets.

Keywords

Citation

Fang, Y., Jin, D., Sun, X. and Wang, H. (2015), "New evidence on alliance experience and acquisition performance: Short-run pain, long-run gain?", Studies in Economics and Finance, Vol. 32 No. 1, pp. 53-73. https://doi.org/10.1108/SEF-07-2014-0130

Publisher

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Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited