The Ex post JV sustainability and acquirers’ performances under the potential threat of adverse selection problem

Abstract

Concerning on JV (joint venture) dissolution, real option approach has focused on benefit-cost analysis. However, a latent risk in JV is adverse selection problem. If wrong partners are matched, parent firms, i.e., acquirers, can select an outside option to terminate JV. Unfortunately, the outside option can be executed only after JV has begun. Our game theoretic model suggests that JV acquirers are more likely to be matched with low type partners as their expected ex ante JV value outweighs the one when they are matched with high type partners. By Bayesian belief update, acquirers are able to tell their partners’ type posteriorly and then JV dissolution can occur. Empirical tests based on US JV data reveal that only manufacturers gain from JV strategy and hierarchical ownership structure is helpful to enhancing acquirers’performances. It is interesting to see that unrelated JV rather than related JV contributes more and, differently from a conventional wisdom, international JV turns out to be as important as domestic JV to acquirers’performances.