Strategic assets as determinants of equity share contributions in joint ventures: a collateral-based theory of financial contracts

Bowe, Michael and Golesorkhi, Sougand (2006) Strategic assets as determinants of equity share contributions in joint ventures: a collateral-based theory of financial contracts. UNSPECIFIED. Manchester Metropolitan University. ISSN 1478-8209

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Abstract

Prior research over several decades has catalogued many factors underlying firm‟s equity participation in joint ventures. This analysis empirically investigates whether agency problems associated with monitoring specialized activities influence the negotiated distribution of equity between collaborating partners at the inception of an equity joint venture (EJV). The proposed framework modifies a financial contracting perspective based upon agency theory and draws on existing theories of EJVs; namely, transaction cost economics, bargaining power and resource-based theory. The central contention is that a primary determinant of the division of equity capital is the requirement for each contracting partner to guarantee its subsequent value-enhancing productive activities that jointly determine the future success of the EJV. Specifically, it is argued that the inherent characteristics of the expertise and/or nature of the strategic assets that a firm contributes to an inter-firm EJV may make it difficult for that firm to guarantee (ex ante) its productive contribution during the negotiation stage. Results from a sample of 194 UK-based EJVs support the view that owners of strategic assets whose potential contribution to the success of the EJV are the most difficult to measure ex ante will negotiate a higher share of equity capital, thereby, partially, guaranteeing their actions.