Reaching across Disciplines for Corporate Strategy Research

1. Reaching across Disciplines forCorporate Strategy Research Jeffrey J. Reuer

2. Agenda • Two caveats • No need to do cross-disciplinary research • Many ways to build theory • Very brief introduction to research agenda • Inspiration for “reaching across disciplines” • Why information economics as a theory? • Why IPOs? • Illustrative paper as “raw data” • Group work and discussion • How might one “reach across disciplines” in building theory? • What are practical guidelines for building such a research agenda?

3. Research Interests

4. Alliance Governance

5. Exchange Hazards Asymmetric Information • Asset Specificity • Uncertainty • Etc. Sources • Hold-Up • Misappropriation • Etc. Adverse Selection Outcomes Timing Ex Ante Hazards Ex Post Hazards Economics of Alliances Williamsonian TCE “Distance” Search Costs

6. Contractual Solutions Ownership Solutions Coping with Information Asymmetries • The problem of asymmetric information • Markets for durable goods, labor, insurance, etc. (e.g., Akerlof, 1970; Spence, 1973; Rothschild & Stiglitz, 1976) • Markets for corporate exchange partners? • Accumulating evidence on solutions: Market Solutions • Contingent Earnouts • IPOs: ‘Dual Tracking’ • Strategic Alliances

7. IPOs and the Corporate Strategy Research Agenda • Under traditional views, IPOs… • are financing choices, • are natural “end states” for successful entrepreneurs, and • relax owner-managers’ wealth constraints. • Emerging evidence • Post-IPO M&A (Pagano et al., 1998; Brau & Kohers, 2005; Brau & Fawcett, 2006) • Going public as “marketing” (Demers & Lewellen, 2003)

8. The Choice Between Joint Ventures and Acquisitions: Insights from Signaling Theory

9. Joint Ventures vs. Acquisitions for IPO Firms • When do firms partner instead of acquire? • Infeasibility • Inflexibility • Indigestibility • Information asymmetry • Alternative remedies unexamined • Little used, mixed evidence • The impact of IPOs • Direct reduction of information asymmetries • Reduction of the adverse effects of information asymmetries through signaling (e.g., Welch, 1989; Riley, 2001) Research question: Do heterogeneous signals affect organizational governance (i.e., JV vs. M&A) in deals involving IPO firms?

10. Theoretical Framework • Exchange Partners • in M&A Market • Diversifying entrants versus rivals • Signals on IPO Firms • Investment bank reputation • Venture capitalist backing • Others • Organizational Governance • Joint venture vs. acquisition - + JV, - Acq. + • Facilitation of Exchanges • Joint venture or acquisition vs. no transactions

11. Methodology • Sampling frame • SDC modules on US firms’ IPOs and JVs and M&A • Timeframe: IPOs during 1986-2001 • Exclusions: REITs, investment funds, equity carveouts, LBOs, financial services firms • Corporate transactions: • JVs: Domestic, two-partner, no non-equity alliance deals • M&A: Domestic, full acquisitions, no prior equity • Time from IPO to JV or M&A: 5 years

12. Methodology • Specification and Measures • Dependent variable: • Governance structure: Joint venture = 1 if JV, 0 if M&A (with sample selection) • Level of commitment: 0 no transaction, 1 JV, 2 acquisition; or 0 no transaction, 1 nonequity alliance, 2 JV, 3 acquisition • Explanatory variables • IB reputation: Index initially developed by Carter & Manaster (1990), using Loughran & Ritter’s (2004) data (0-9) • VC Backing: 0/1 variable from SDC • Knowledge distance: Employment distributions across industries and indicators for 3-digit SICs • Controls • Tobins’ Q of target, knowledge distance, target underpricing, lockup provision, exchange partner firm alliance and acquisition experience, target size and performance, sector fixed effects

13. Results • Descriptive findings • 15% JVs, 85% acquisitions • 46% of the deals were inter-industry at 2-digit level (75% for JVs, 41% for M&A) • The likelihood of JV goes from 15 to 25 percent from smallest to largest firm size quintiles • The likelihood of JV is up to 3-4 times as large if a prominent I-bank is absent • Firms partner with VC-backed firms 8% of the time and partner with non VC-backed firms 24% of the time

14. Results: First-Stage Selection Models H1 H3

15. Results: Second-Stage Entry Mode Models H2 H4 H5 H6

16. Results: Ordered Probit Models

17. Implications for Research • Information costs need to be studied to: • complement TCE to attend to ex ante exchange hazards • address pre-formation processes (e.g., search, negotiations, etc.) prior to the contracting stage • Information costs are closely tied to other transaction costs • Search might be endogenous to transaction-specific investment • Information asymmetries might lead to post-merger integration challenges • Problems due to hidden information (i.e., adverse selection) and hidden action (i.e., moral hazard) often go hand-in-hand Search and Discovery Deal Implementation Partner Selection Deal Structuring

18. Group DiscussionHow can one “reach across disciplines” in management research?What are some good (or bad) ways of doing so?What are some practical tips for developing a research agenda?Any Q&A

19. How Can One Reach Across Disciplines and Build a Research Agenda? • Two problems in grad school… • “Reading SMJ to write for SMJ” • “Integration” • Inspiration through importation • You can use stepping stones (e.g., corporate finance)… • Read the giants in the core discipline (e.g., economics) (see next slide) • Concrete puzzles and business problems (e.g., “putting a company on the tee”) • Analogical reasoning (e.g., used car market) • Turn the tables on yourself (e.g., boundary conditions for the theory, drawbacks, etc.) • The need for contextualization of the theory

20. Contextualizing the Theory • The opportunism assumption • resource misrepresentation versus ex post hazards • due to incentives created by terminal transactions • Transactions are embedded in different contexts (e.g., nations, cultures, relationships, etc.) • Contexts as a source of information asymmetry (e.g., Deloitte study of M&A in emerging markets) • Contexts as a locus of remedies to information asymmetry (e.g., asocial (e.g., contracts) or social (e.g., interpersonal networks, trust, endorsements, etc.)

21. Relationship between Information Economics and TCE • Occasional reviewer comments: • This is not theory • This is just TCE • What would Williamson say? • Williamson (1975), Markets and Hierarchies: “information impactedness” appears on 41 pages (vs. 57 for “opportunism”) • Williamson (1985), The Economic Institutions of Capitalism: “information asymmetry” on 11 pages • Williamson (2005, footnote 4): “[t]he economics of information also deals with contractual hazards, but mainly of a different kind than those dealt with [in TCE]. Thus, where insurance is the paradigm problem for the economics of information, vertical integration is the paradigm problem for [the] governance [branch].” • Williamson (2002: 178): “Because transactions in intermediate product markets avoid some of the more serious conditions of asymmetry – of information, burden, legal talent, risk aversion and the like – that beset some transactions in final product markets, I examine the ‘make or buy’ decision.”

22. Contextualizing the Theory • New predictions for JV (+) vs. M&A (-): Variables “claimed” by TCE and IE

23. How Can One Reach Across Disciplines and Build a Research Agenda? • Practical hints • Think about where you will get inspiration in concrete terms • Focus: Research as making toast • “Sharpen the saw” • Who is the reader? The conversation has to be a management conversation Darkness time