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Board Incentive, Director Experience, and Outcomes of Joint Venture Investment

Jung-Ho LaiDepartment of Finance, National Taipei College of Business, Taiwan

 I-Ju Chen

Division of Finance, College of Management, Yuan-Ze University, Taiwan

The NTU International Conference on Finance, 2010

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Investigate the advising role of board members to the success of a JV strategy.

Purpose

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Motivations

Firms have incentives to maximize firm resources (Eisenhardt and Schoonhoven, 1996; Das and Teng, 2000) Firm resources are usually firm-specific,

Ex: not perfectly tradable (Chi, 1994; Oliver, 1997)

Ex: with various degree of mobility, imitability, and substitutability (Miller and Shamsie, 1996; Das and Teng, 1998)

JVs is a useful tool for organization learning and optimal resources utilization (Kogut, 1988)

Importance of JVs (Joint Ventures)

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Motivations

ex-anti a JV partner search ex-post JV managementOpportunism incentives

Difficulties of forming a JV

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Difficulties of ex-anti a JV partner search difficulties to gain the information about other firm’s

resources (Pearce, 1997; Gulati and Gargiulo, 1999; Gulati and Westphal, 1999; Park and Ungson, 2001)

Ex: Skills or know-how are usually tacit and deeply embedded (Das and Teng, 1998)

Embeddedness is a kind of interpersonal relationships that people have developed for business interaction in networks. (Nahapiet and Ghoshal,1998)

Ex: Lack mutually trust among firms (Kogut, 1989; Hamel, Doz, and Prahalad, 1989; Gulati, Khanna, and Nohria, 1994; Khanna, Gulati, and Nohria, 1998; Gulati and Westphal, 1999).

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Difficulties of ex- post a JV management

Coordination/integration difficulty between JV partners:Different management, operation structures,

performance evaluation system (Park and Ungson, 2001; Luo, 2008)

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Opportunism incentive of JVs partners may tend to seek temporal, critical strategic interdependence (Kogut, 1989; Gulati and Westphal, 1999)

Opportunism incentive of JV partners also leads to ex-post instability of JVs (Kogut, 1989; Gulati and Westphal, 1999)

=> Firms need to reply on trustworthy and knowledgeable experts to provide the management team with valuable information for JV decisions. (Pearce, 1997; Gulati and Gargiulo, 1999; Gulati and Westphal, 1999; Park and Ungson, 2001).

Opportunism incentives of JV partnering firms

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We argue …

We argue that the past JV experience and relevant industry expertise of board members is crucial to the effectivenss of joint venture decisions.

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Contributions

Not only board’s monitoring, board’s advising and consulting benefit to the success of corporate decisions.board’s prior JV experience and relevant industry

expertise contribute to JV success.

complements the JV literature by addressing director’s past relevant experience is a significant value contributing to value gains in firms’ JV strategies.

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Features of a successful JV

Successful characteristics of a JV decision: (Bierly and Gallagher, 2007)

matching with strategic fit,mutually trusta timely response to the environmental

uncertainty

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interorganizational networks (Gulati and Gargiulo, 1999): alleviate the risk of opportunism associated with the corporate cooperation

external tacit knowledge (O’Hagan and Green, 2002)

trustworthy information (Gulati and Gargiulo, 1999; Gulati and Westphal, 1999; Kim and Cannella, 2008)

=> suitable partner selection in JVs (Gulati and Westphal, 1999)

Directors serve advising roles to the management

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The value of experience Accumulation of experience

can elicit a more complete understanding of the cause-and-effect relation of a strategy (Gulati, Khanna, and Nohria, 1994; Khanna, Gulati, and Nohria, 1998).

refines expert’s capabilities of distinguishing important from unimportant information in the whole information set (Ericsson and Charness, 1994; Ericsson and Lehamn, 1996).

feels comfortable and confident to advise managers and make contributions to firm competitive advantages (McDonald, Westphal, and Graebner, 2008).

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Experience in relevant industry

Information about specific industry is confidential, organizational embedded, and varies by industries (Certo, 2003; Gulati and Garguilo, 1999; Kor and Sundaramurthy, 2009)

Value of directors’ industry experiences:Understand the competitive conditions or technology

development (Arthur, 1994; Boeker, 1997)Able to accurately assess candidate partner’s

resources, competencies, and potential synergy for each partnership

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To sum up,

Directors’ prior JVs experience and their industry experience has the characteristics:Tacit expertise,Vividness and recency, Built on a trustful relationAble to identify emerging opportunities in specific

industry

=>their experience is expected to be crucial to a successful JV decision.

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Hypotheses

quickresponse

to external

resource fit

mutual trust

Board experience on JVs and relevant industry

Success of JVs

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Hypotheses statement

H1: JV firms with more directors who have previously been involved in JV decisions will perform better than JV firms with fewer outside directors having such experiences.

H2: JV firms with more directors who have experiences in partner firm’s industry will perform better than firms with fewer directors having such industry experiences.

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Hypotheses Statement

Hypothesis 3a: Board member ownership will be associated with more significantly positive outcomes of JV announcements where board has more directors with JV experiences.

Hypothesis 3b: Board member ownership will be associated with more significantly positive outcomes of JV announcements where board has more directors with experiences relevant to the partner firm’s industry.

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Sample and Methodology

JVs Sample: an initial sample of joint ventures made by U.S. corporations was taken from the Security Data Corporation’s (SDC) Mergers and Corporate Transactions database

Sample period: 2001-2008 JV announcement date: Lexis/Nexis database and the

Dow Jones News Retrieval Service database Board characteristics and ownership data source:

Disclosure, Inc.’s Compact Disclosure database, Standard and Poor’s Registor of Corporations, Directors, and Executives, and corporate proxy statements.

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Sample and Methodology

Data on financial and operating characteristics came from Compustat.

 Stock returns data were from CRSP.  Our search identified 462 announcements of joint

ventures made by US firms.  Methodology – event study approach Dependent variable: CAR (-1, 0)

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Independent variables I

Independent variables I: directors’ prior experiences with JVs

Where indicates a JV decision of a focal firm at the N firms where the individual served as manager or director in year Y (t indicated the time of the survey), and D indicates the number of directors on the board making a JV decision.

Steps:1. For each JV firm, count past JV experience for each director2. Those JV experience is counted only if director served as manager or director in other firms which also have JV experience.3. Survey period cover past 8 years prior to the JV event.4. Then, cumulate the experience held by each director.

D

d

t

tY

N

F

eFYJV

1

8

1 1, )(

eFYJV ,

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Independent variables II

Independent variables II: director’s prior experiences with specific industry

Where indicates an JV of a company that has the same two-digit SIC code as JV firm F at the N firms where the focal individual served as manager or director in year Y, and D indicates the number of directors on the board making the focal JV decision.

D

d

t

tY

N

F

indFYJV

1

8

1 1, )(

indFYJV ,

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Sample Distribution by Year and International/Domestic tie-up

Panel A. Sample Distribution by Year and International/Domestic tie-up

Year / Sample Cases International Domestic

2001 23 25

2002 10 27

2003 21 15

2004 28 24

2005 43 31

2006 41 27

2007 56 49

2008 23 19

Total 245 217

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Descriptive Statistics and Pearson Correlation Coefficients

　 Variables Mean S.D. 1 2 3 4 5 6 7 8 9 10

1Cumulative Abnormal Returns (%) 0.412 1.851 1

2Director experiences with JVs 9.784 8.524 0.145 1

3Director experiences with partner’s industry

3.720 2.133 0.108 0.212 1

4Director ownership 0.015 0.092 0.043 0.053 0.045 1

5Board size 8.515 2.231 -0.018 0.125 0.087 0.073 1

6Board independence 0.730 0.133 0.033 0.058 0.058 0.052 0.165 1

7Firm’s prior JV experience 3.944 2.229 0.049 0.031 0.043 -0.017 0.121 0.016 1

8Firm’s past profitability 0.042 0.173 -0.061 0.047 -0.027 -0.033 -0.012 0.013 0.026 1

9Debt Ratio 0.134 0.112 0.082 0.062 0.021 0.025 0.059 -0.012 0.039 -0.066 1

10Asset specificity 0.032 0.026 -0.063 0.031 0.072 0.053 0.090 0.082 0.069 0.021 0.004 1

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Cross-sectional Regression of JVs Announcement Effect on Director Experience

Variable/Model 1 2 3 4 5Experience Variable

Director Experience with Joint Ventures0.061*** 0.054** 0.046**

(2.97) (2.14) (2.06)

Director Experience with Partner’s Industry0.063*** 0.057** 0.037**

(2.89) (2.16) (1.95)Moderated Variable

Director Ownership* Director Experience with Joint Ventures0.080** 0.090*(2.01) (1.79)

Director Ownership* Director Experience with Partner’s Industry

0.035* 0.027*(1.98) (1.66)

Controls

Firm’s past Profitability-0.028** -0.034** -0.034* -0.056* -0.037*(-2.13) (-2.09) (-1.91) (-1.91) (-1.89)

Debt Ratio0.012* 0.016* 0.021* 0.017 0.011*-1.78 -1.91 -1.84 -1.64 -1.74

Board size-0.001 -0.001* -0.001 -0.001* -0.021*(-0.98) (-1.72) (-1.55) (-1.83) (-1.66)

Board independence0.021 0.015 0.035 0.007 0.082-0.98 -0.76 -0.45 -0.02 -0.95

Firm’s prior JV Experience0.034 0.042 -0.051 0.069 0.053-1.09 -0.97 (-0.23) -1.03 -0.67

Asset specificity-0.067* -0.057* -0.047* -0.031 -0.079*

-1.88 -1.91 -1.79 -1.11 -1.65 Industry Dummy Included Included Included Included Included Yearly Dummy Included Included Included Included IncludedAdj-R2 0.0604 0.0565 0.0532 0.0488 0.0449F-statistic 5.45*** 4.53*** 4.21*** 3.46*** 3.32***No of Observations 462 462 462 462 462

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Conclusions

affirm our conjectures that director past experiences are helpful for firms’ joint venture decisions.

indicate that director’s knowledge accumulated from prior joint venture undertakings as well as relevant industry experiences can determine the effectiveness of their advise to the management, particularly when directors have higher level of stockholdings.

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Thank You.

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Comments Welcome.