The Wealth Effect of Japanese-U.S.

Strategic Alliances

Shao-Chi Changa Sheng-Syan Chenb Jung-Ho Laic

Professor, Institute of International Business, National Cheng Kung University, Tainan, Taiwan.

Professor, Department of Finance, College of Management, National Taiwan University, Taipei, Taiwan. Assistant Professor, Department of Finance, National Taipei College of Business, Taipei, Taiwan

Abstract We investigate the wealth impact for Japanese and U.S. firms that announce non-equity strategic alliances. We find that on average, both Japanese and U.S. shareholders benefit from the formation of international alliances. We also find that shareholders earn larger abnormal returns in these alliances when the partnering firms are relatively small in size, have higher growth opportunities, or are less profitable. We show that both Japanese and U.S. partnering firms display significant improvements in operating performance over the three-year period subsequent to the formation of international alliances.

_____________________
The authors wish to thank Lyda Bigelow, Dosoung Choi, William G. Christie (the Editor), Munir Hassan, Kim Wai Ho, Frank C. Jen, Cheng-few Lee, and especially an anonymous referee for helpful comments and suggestions. Seminar participants at the 2004 Financial Management Association Annual Meeting, the 2004 Academy of Management Conference, and the Eleventh Annual Conference on Pacific Basin Finance, Economics, and Accounting provided many valuable comments. Sheng-Syan Chen acknowledges funding from the National Science Council in Taiwan (NSC90-2416-H155-021).

The Wealth Effect of Japanese-U.S. Strategic Alliances

With the integration of global markets and rapid shifts in technologies, the formation of cross-border interfirm cooperation has become a favored strategy of international expansion (Gulati, 1995). Alliances with foreign partners are an important strategic move that could provide access to outside sources of competitive advantage in the global network (Kogut, 1983, and Lummer and McConnell, 1990). For example, The Wall Street Journal (WSJ) reported on August 25, 1998 that Lockheed Martin Corporation and Japans Mitsubishi Electric Corporation had reached an agreement that provided Mitsubishi with access to Lockheed technology, while helping Lockheed to expand sales in Japan. The two companies would jointly develop electronic missile-control systems and radar devices for ships and planes. Investors responded positively to this agreement. When the agreement was announced, the share prices of both Lockheed and Mitsubishi rose sharply. Clearly, the announcement of an international alliance affected the equity values of the participating firms. Although alliances with foreign partners take various forms, much of the previous research focuses only on the stock valuation impact of announced international joint ventures (IJVs) that establish separate entities under shared ownership (see, e.g., Lummer and McConnell, 1990; Chen, Hu, and Shieh, 1991; Crutchley, Guo, and Hansen, 1991; and Gupta and Misra, 2000). Nevertheless, a significant number of international strategic alliances (ISAs) involve simple agreements with no equity ties, in which the partnering firms do not share equity control or create a new organizational identity. In fact, such non-equity arrangements account for more than 50% of all collaborative arrangements

across industries (Zagnoli, 1987, and Chan, Kensinger, Keown, and Martin, 1997). In addition, non-equity ISAs provide more organizational flexibility to the partnering firms than do IJVs (Mody, 1993). Non-equity ISAs can form new links with partnering firms or disband quickly in response to changing market demands. This flexible structure

facilitates experimentation with new combinations of participants in the development of new products, technologies, or markets. Therefore, non-equity ISAs are particularly valuable to those firms that compete in environments characterized by rapid rates of change in product design and process technologies, with significant risks of failure at the development stage, and rapid obsolescence of products once they enter production (Chan et al., 1997). In this paper, our objective is to examine the wealth effect of non-equity ISAs on the shareholders of the partnering firms. We also investigate the importance of differences in the characteristics of firms and alliances in determining the valuation consequences across firms. We examine a sample of non-equity ISAs formed between Japanese and U.S. firms over the 1989-1998 period. Focusing on the sample of Japanese-U.S. strategic alliances enables us to investigate the wealth gains for both domestic and foreign partners. This sample also allows us to examine the determinants of value creation without confounding influences from various business environments when ISA partners come from different countries.1 Our study is different from Chan et al. (1997), Das, Sen, and Sengupta (1998), and Allen and Phillips (2000), who investigate the wealth effect of domestic strategic alliances
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For example, a sample of ISAs involving partners from many different countries may have problems in objectively and correctly measuring culture distance (Parkhe, 1991). Another potential issue is that

(DSAs). Although ISAs can have value for reasons common to DSAs, they may produce additional benefits because they cross national borders (Crutchley et al., 1991). In addition, ISAs are typically used as a means to implement international expansion and diversification strategies, while DSAs focus more on restricting intra-industry competition (Glaister and Buckley, 1999). Our results indicate that shareholders of U.S. partners realize significant gains when they announce strategic alliances with Japanese firms. Shareholders of Japanese firms also experience gains from such ISAs. Our evidence suggests that ISAs produce a positive wealth impact for the combined partnering firms without wealth transfers between partners. We also find that shareholders earn larger abnormal returns in the Japanese-U.S. alliances when the partnering firms are relatively small in size, have higher growth opportunities, or are less profitable. Finally, we show that both Japanese and U.S. partnering firms exhibit significant improvements in their operating performance subsequent to the alliances. The paper proceeds as follows. In Section I, we elaborate on the advantages and disadvantages of non-equity ISAs and investigate the potentially important determinants of their wealth effect. In Section II, we describe our sample and present summary statistics. In Section III, we examine the stock price response to announcements of Japanese-U.S. strategic alliances, and in Section IV, we report on operating performance for the partnering firms in these alliances. Section V concludes.

I. The Economic Consequences of ISAs

government policies in many developing countries constantly experience changes. Consequently, ISAs are

In this section, we discuss the benefits and costs associated with non-equity ISAs. We then investigate the determinants of their valuation impact.

A. The Benefits and Costs Associated with ISAs Cross-border interfirm collaboration offers several benefits to the partnering firms. Many global alliances are motivated by the recognition that self-sufficiency is too slow and costly to bring success in an intensively competitive global market (Inkpen, 1995). With the aid of foreign partners, ISAs may help firms to explore new market opportunities, reduce investment risks, or establish distribution channels more efficiently and effectively. These advantages are particularly critical for firms with limited resources and for those that compete in an attractive, but unfamiliar, market (Harrigan, 1987). Thus, ISAs serve as an important move that facilitates international expansion strategy. Another benefit of ISAs is based on the arguments from transaction costs economics (Williamson, 1989). The proponents of the transaction costs approach

emphasize that because neither partner has to bear the full risk and costs of the alliance activities, the hybrid organizational form of ISAs involves a mutual commitment not commonly found in market transactions. ISAs simultaneously reduce both the uncertainty and the costs of resources investment associated with full-scale internalization. With a properly designed governance structure, ISAs are beneficial in reducing costs associated with negotiating, implementing, and monitoring cross-border interfirm transactions. ISAs also enable the partnering firms to obtain resources that enhance firms competitive advantages (Eisenhardt and Schoonhoven, 1996). The resources-based view suggests that ISAs generate competitive advantages and improve performance beyond

simply not comparable across time.

firms domain by providing access to strategic resources in physical capital, technology, manufacturing facilities, and others, from their partners. These strategic resources are usually scarce and lack direct substitutes (Oliver, 1997). In addition, firms may even obtain access to other resources beyond those of their alliance partners. Through alliances with foreign partners, firms might enhance social resources by achieving an important position advantage in the global network. From the perspective of organizational learning, ISAs also allow firms to focus on their own core competence, and at the same time, to learn to enhance other capacities from collaborating with partnering firms. Through the platform of ISAs, firms may acquire tacit skills and knowledge embedded in their foreign partners that are crucial for remaining competitive in the rapidly changing global markets (Porter and Fuller, 1986). Such knowledge can be useful in strengthening the strategic, operational, and tactical aspects of businesses. Furthermore, ISAs may improve firms competitive position through learning country-specific comparative advantages from their foreign partners (Shan and Hamilton, 1991). Despite these advantages, ISAs are often plagued by interest conflicts between partnering firms. Alliances are essentially incomplete contracts because ex ante, it is often impossible to completely specify the future contingencies that may arise in the implementation of the agreements (Hennart, 1988, and Jensen and Meckling, 1991). The contractual incompleteness leads to the possibility that firms could expose themselves to opportunistic exploitation by the partnering firms that may break off or change the agreements. This is the hold-up problem usually found in contractual collaborations (Mody, 1993). In addition, anticipating the potential ex post opportunism in distributing

the resulting profits, partnering firms may have less incentive to make investments ex ante, especially in a situation in which the assets involved are specific to the alliance ventures. Consequently, the hold-up problem could significantly reduce the realized synergy from collaboration or result in renegotiations or even termination of strategic alliances (Das et al., 1998, and Allen and Phillips, 2000). This problem plays an important role in ISAs since collaboration with partners from different countries could create greater barriers to mutual trust and understanding. Furthermore, it is difficult to specify complete future contingencies in a rapidly changing global market.

B. The Determinants of the Wealth Effect of ISAs Here, we discuss the potentially important determinants of the wealth effect of non-equity ISAs.

1. Partner Relative Size ISAs between firms of unequal size are not uncommon and are particularly prevalent in the computer and biotechnology industries (Barley, Freeman, and Hybels, 1992, and Thayer, 1995). In Section A of the Appendix, the alliance of 3DO with Toshiba and the alliance of Silicon Graphics with Nippon Telegraph and Telephone, both in 1994, provide such examples. According to resource dependence theory (Pfeffer and Salancik, 1978), firms enter alliances in search of valuable resources that they themselves lack. Larger firms usually seek out smaller, innovative firms for their technological know-how (Koh and Venkatraman, 1991). ISAs with larger partnering firms may provide several important benefits to the small partners. Large firms often have more abundant resources in capital availability,

logistic distribution, product manufacturing, marketing forces, or other organizational competitiveness that are crucial to the long-run success of small firms (Alvarez and Barney, 2001). Through ISAs, small firms can obtain access to those resources that are otherwise not available. In addition, cooperation with large partners may give a firm a social legitimacy that could provide valuable access to the resources outside of ISA partners. For example, through ISAs with larger partners, small firms may have the chance to participate in international networks that provide valuable information, or gain better legitimacy within the networks (Gulati, 1995). This advantage not only enhances their own reputation as a desired partner, but also reduces competing rivals partnering opportunities. Finally, if there is a positive wealth effect in an ISA, and if the dollar value of the gain is divided approximately evenly between the two participant firms, then the abnormal return of the small partner should be larger than that of the larger partner. Therefore, the relative size hypothesis predicts that the stock markets response to announcements of ISAs will be more favorable for the participating firms that are smaller than their alliance partners.

2. Growth and Technological Opportunities Since ISAs do not involve equity commitment, the organizational flexibility inherent in alliances facilitates experimentation with new combinations of participants in the pursuit of sustainable growth under great uncertainty (Crocker and Masten, 1988, and Mody, 1993). The option of experimenting is particularly valuable to firms that enter technical ISAs, firms that are growing rapidly, or high-tech firms that compete in environments characterized by quick changes in product design and process technologies and by the rapid obsolescence of products (Chan et al., 1997, and Das et al., 1998). Therefore, we expect to find that technical ISAs involving the transfer or pooling of 8

technological knowledge, or those involving firms with high growth potential or in high-tech industries, contribute more value to the partnering firms than do the non-technical ISAs or those involving firms with limited growth opportunities or in low-tech industries.2

3. Business Relatedness The transaction costs theory proposes that the overlap of partners businesses benefits ISAs in production and transaction gains, because of a common ground for the development of cross-sharing of technology and skills (Chan et al., 1997). Business similarity can also allow firms to better identify the partners contributions. When partnering firms are from unrelated businesses, the performance of the ISA may be harmed because differences in management and valuation on the joint activities exacerbate the potential conflicts (Harrigan, 1988). In addition, because business

relatedness enables firms to detect and thus prevent the imposition of partners opportunistic behavior, the potential costs associated with ISAs are reduced. Finally, the closer the partners are, the more effectively can pooling of operations help them exert market power in their product-market space (Kogut, 1988). However, cooperation between firms in related businesses can be difficult. ISAs formed by firms in related businesses blur the distinction between competition and cooperation (Porter and Fuller, 1986). The conflicting objectives of the competing partners could reduce the intended synergy of collaboration. The tension faced by a partnering firm in attempting to manage both a cooperating strategy and a competing

Although technical ISAs may present greater potential benefits, they also present greater risk of technology being stolen.

strategy with rivals may become too difficult to reconcile. Park and Russo (1996) suggest that ISAs with competitors tend to be unstable and could easily dissolve or break-up. In fact, many alliances involving rivals may actually spark a learning race and induce competition, rather than cooperation, between partnering firms (Baum, Calabrese, and Silverman, 2000). Furthermore, the motives behind an ISAs formation may depend on the existence of complementary resources in the potential partners. Alliances with partners in unrelated industries are more likely to pool complementary assets and resources than are alliances between related partners, which would simply duplicate their assets (Mohanram and Nanda, 1996).3 Therefore, considering all these arguments together, the relation between business relatedness and the wealth effect of ISAs appears to be ambiguous.

4. Prior Involvement in International Interfirm Collaboration The characteristics of incomplete contracts inherent in ISAs create possibility of partners exploitation and, in turn, reduce shareholders wealth. The risk of opportunistic behavior from ISA partners can be reduced as firms develop experience in anticipating the contingencies and responding to them in an effective manner (Cohen and Levinthal, 1994). When repeatedly engaging in similar sets of activities, firms improve and refine their routines. With greater experience in cross-border collaboration, managers are better able to internalize and refine skills in managing interfirm cooperation, and to enhance their
3

Although marketing agreements appear to have greater strategic value for firms engaged in related activities, there are several potential gains from marketing ISAs between firms in unrelated sectors. First, a marketing ISA could be a distribution tie-up in which one firm markets the product manufactured by its partner. Second, firms may jointly market a product set that combines products offered by both partners, and hence firms take orders separately. Finally, marketing ISAs with partners from unrelated industries can also be tightly structured, with one firm inserting its product into that of its partner, thus offering customers a more

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absorptive capacity from the alliances.

Furthermore, the specialized organizational

learning from prior experience is not easily imitated and can actually become an important competitive advantage to the firm (Collis, 1996). Therefore, we expect that ISAs are more valuable for the partnering firms that have a greater level of prior involvement in cross-border interfirm collaboration.

5. Profitability More profitable firms may have a smaller need to engage in the risks of multinational activity, making the risk-reward ratio for ISAs less favorable for these firms, and yielding a lower value gain for more profitable firms. In addition, once engaged in ISAs, more profitable partners are likely to commit more resources (Glaister and Buckley, 1996). Because of this, less profitable partners may have a greater chance to improve and acquire new resources, while more profitable partners may have less to gain. Das et al. (1998) argue that in some ISAs, the more profitable, established firms are likely to be the first movers, because they may need the special capabilities of innovative, less profitable firms. However, being the first mover usually results in weaker bargaining power in the process of negotiating alliances, suffering from the hold-up problem (Hamel, Doz, and Prahalad, 1989). To the extent that the opportunistic behavior impedes the stability of and synergy created from ISAs, more profitable firms are likely to suffer from first-mover disadvantages. Thus, we expect them to receive less wealth gains in ISAs.

6. The Partners Home Currency Strength

integrated, better functioning product mix. In the Appendix, Section B provides several examples of marketing ISAs between partners in unrelated sectors.

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The valuation impact of an ISA may be related to the strength of the partnering firms domestic currency. When there are imperfections in the flow of goods and services across national borders, the ISA may provide a vehicle for taking advantage of the cost and revenue differentials induced by changing exchange rates (Doukas and Travlos, 1988, and Crutchley et al., 1991). If a partnering firms domestic currency is relatively strong, then gains to its shareholders can arise if the foreign alliance partner purchases finished goods and services, or if production is located across the border through an ISA. In this way, the domestic cost of goods or services in the foreign country with a devalued currency are kept low, while the value of those goods or services increases. Therefore, the currency strength hypothesis predicts that wealth gains in ISAs are greater when the ISA partners domestic currency is relatively strong.

II. Sample and Descriptive Statistics Here, we describe our sample design and characteristics.

A. Sample Design We obtain our initial sample of Japanese-U.S. strategic alliances from the Securities Data Corporations (SDC) Worldwide Merges, Acquisitions, and Alliances database. The sample period is from 1989 to 1998. We delete alliances involving equity investments, such as joint ventures and minority equity participation, because our study focuses on non-equity ISAs. We then search for their initial announcement dates in the WSJ. To be included in the final sample, the alliances must meet the following criteria:

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(1) To investigate the wealth gains for both domestic and foreign partners, U.S. and Japanese partnering firms must have daily stock price information available from the Center for Research in Securities Prices (CRSP) returns files and Datastream. (2) To facilitate investigation of the determinants of the wealth effect, strategic alliances must involve only one U.S. firm and one Japanese firm in the same alliance. (3) To avoid any confounding events that could distort the measurement of the valuation effects, U.S. firms must not have made other announcements five days before or five days after the initial announcement date.

B. Sample Characteristics Our final sample comprises 178 announcements of Japanese-U.S. strategic alliances. Panel A of Table I presents the sample distribution by calendar year. The largest number of announcements of Japanese-U.S. strategic alliances in one year is 28 (15.7%) in 1992, followed by 27 (15.2%) in 1994. Panel B provides the frequency of ISAs for sample firms and a list of representative firms. Japanese firms with a high frequency of ISAs are Hitachi, Toshiba, NEC, Sony, Fujitsu, Mitsubishi Electric, and Sanyo Electric, while U.S. firms with a high frequency of ISAs are IBM, Texas Instruments, and Microsoft. Most ISA partnering firms in our sample are multinational corporations.

[Insert Table I here]

Panel C reports the participating firms size as measured by the market value of equity 30 days before the announcement. For ease of comparison, we convert the measure of firm size to 1998 dollars using the Consumer Price Index from IMFs International Financial Statistics. When the Japanese firms equity is reported in yen, we convert it into 13

dollars, using the exchange rate appropriate to the strategic alliance announcement date. The U.S. partners are, on average, smaller than the Japanese partners. Panel C, which uses the four-digit primary Standard Industrial Classification (SIC) codes in Datastream, also shows that both Japanese and U.S. partners in our sample are, on average, larger than their industry peers. Panel D shows the sample distribution by type of cooperative agreement according to SDCs classification scheme. Most of the Japanese-U.S. alliance announcements involve marketing agreements (32.6%), followed by licensing agreements (24.7%).4 Panel E classifies the Japanese-U.S. partnering firms into high- and low-tech groups according to Business Weeks classification scheme. We find that 77% of the participating firms belong to a high-tech industry. Most of the high-tech partnering firms come from the computer, information technology, and software industries (43%), followed by semiconductors and electrical equipment (12.9%). The largest group of low-tech firms comes from the machinery and equipment sector (5.1%), followed by the motor vehicle and auto bodies industry (3.4%). Panel F presents summary information for several explanatory variables. We collect data on U.S. and Japanese patterning firms characteristics from Compustat and Datastream. We also collect data on alliance characteristics from SDC and the WSJ articles. We define relative size as the announcing firms size divided by its partners size. We estimate growth opportunities by a simple measure of Tobins q: the ratio of the market to
4

The licensing alliances involve agreements in marketing or technology. In marketing licensing, the licensor usually grants marketing rights for a specific geographical region to the licensee. In return, the licensee pays a royalty or licensing fee for the legitimacy. In technology licensing, the licensor may grant the licensee rights to develop products based on the licensed technology. Some alliance partners may also license in

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book value of the firms assets, where the market value of assets equals the book value of assets minus the book value of common equity plus the market value of common equity.5 The q variable is the average q for the three fiscal years prior to the announcement. The high-tech industry dummy equals one for partners that operate in high-tech industries, and zero otherwise. We measure prior experience in international collaboration by the number of both international non-equity alliances and joint ventures with partners from foreign countries within five years preceding the announcement date. We measure profitability by the ratio of net income to the book value of assets (NI/assets) for the fiscal year prior to the announcement. We use t-tests and Wilcoxon rank-sum tests, respectively, to assess the differences in means and medians between U.S. and Japanese firms. Panel F shows that the Japanese partnering firms in the sample are significantly larger and have significantly greater experience in cross-border collaboration than their U.S. partners. In contrast, the U.S. partnering firms have significantly higher growth opportunities and are more likely to come from high-tech industries than the Japanese partners. According to the median difference, the U.S. partnering firms are also

significantly more profitable than the Japanese partners. We also investigate if our U.S. sample firms engage in other forms of interfirm collaboration. We search for their IJV activities from the SDCs Worldwide Mergers, Acquisitions, and Alliances database. We find that our U.S. sample firms undertake 1,083

technology mutually, forming a cross-license. A licensing agreement can be a universal one that covers both marketing and technology. In the Appendix, Section C gives several examples of licensing agreements. 5 This simple measure of q for investment opportunities has been widely used in previous studies (see, e.g., Kang and Stulz, 1996; D'Mello, Tawatnuntachai, and Yaman, 2003; Almazan, Hartzell, and Starks, 2005; Jandik and Makhija, 2005; and Deshmukh, Howe, and Luft, 2006).

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IJVs during the sample period. This suggests that they also actively engage in IJV activities. The activities of ISAs are different from those in IJVs. Previous studies suggest that interfirm collaboration with a higher level of transaction uncertainty or interdependency, such as co-manufacturing, is more likely to be organized with joint ventures, while that with a lower level of transaction uncertainty or interdependency, such as co-marketing, is more likely to involve strategic alliances (Van de Ven, 1976; Sengupta and Perry, 1997; and Allen and Phillips, 2000). Direct ownership in joint ventures helps solve the problem of incomplete contracts in strategic alliances and reduces transaction uncertainty. Further, the hierarchical controls associated with joint ventures lead to the simplification of the decision-making process and reduce the cost of interfirm coordination as interdependence increases (Gulati and Singh, 1998). Xie and Johnston (2004) show that upstream value chain activities such as joint manufacturing and exploration are more likely to be arranged through joint ventures, whereas downstream activities such as co-marketing, shared distribution, branding alliance, and reciprocal marketing are dominated by strategic alliances. Consistent with this evidence, our results in Panel D of Table I show that the largest proportion of our sample of Japanese-U.S. strategic alliances consists of marketing agreements. Previous studies also suggest that the choice of alliance types is determined by environmental uncertainty. Although joint ventures function better in aligning partners incentives, contract agreements offer more strategic flexibility for partners to enter or exit this cooperative relationship to adapt to the environmental uncertainty (Harrigan, 1988). Therefore, non-equity alliances are particularly valuable to those firms that compete in

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environments characterized by drastic technology change (Osborn and Baughn, 1990, and Chan et al., 1997). In Panel E of Table I, our findings are consistent with the notion that uncertainty that characterizes research and product development in high-tech environments conduces to a high level of ISA formation activity. We further investigate if our U.S. sample firms also engage in DSAs. Using data from SDC, we find that our U.S. sample firms undertake 2,518 DSAs during the sample period. This suggests that they also actively engage in domestic strategic activities. The motives for U.S. firms to establish alliances with Japanese firms are different from those that motivate alliances with domestic firms. U.S. firms often use ISAs as a means to implement international expansion. Such activities as cross-licensing,

distribution, and marketing alliances are often used to overcome the entry barriers created by differences in cultural and business environments (Glaister and Buckley, 1999). In Section D of the Appendix, the alliances of Cray Research with Hitachi in 1989, HP with Oki Electric Industry in 1992, and Wal-Mart with Ito-Yokado in 1994 illustrate such a motive. Another motive that differs from those behind DSAs is that ISAs may be formed in an attempt to create a worldwide industry standard. Global market integration and the free movement of goods between countries elicit tough competition worldwide. Breakthroughs in technology come faster, marketable products appear sooner, and product life cycles shrink rapidly. Therefore, the conventional thinking that firms should internally bootstrap know-how and hold onto it tightly is questionable, because firms may run the risk of getting overrun by competitors with alternative technologies (Johansson, 1995). Partners in ISAs can work together to create worldwide standards to alleviate the uncertainty of

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product development in the increasingly integrated global market. Once the technical standard is agreed on, uncertainty in technology development is greatly reduced. In Section E of the Appendix, the alliances of Motorola with Fujitsu in 1995, 3DO with Matsushita Electric Industrial in 1995, and Microsoft with Sony in 1998 provide examples of such a motive.

III. Stock Price Responses to Alliance Announcements In this section, we investigate the stock price response for the whole sample of announcing firms and then analyze subsamples stratified according to the characteristics of firms and alliances. The cross-sectional regression analyses are also studied in detail.

A. Overall Sample We use standard event-study methods to examine stock price responses to announcements of Japanese-U.S. strategic alliances. We define Day 0 as the initial announcement date. We calculate abnormal returns as the difference between the actual return and an expected return generated by the market model. We use the value-weighted CRSP index and the value-weighted Nikkei 225 Index as proxies for U.S. and Japanese market returns, respectively. We estimate the parameters of the market model using the data over the period from 200 to 60 days before the announcement date.6 We generate abnormal returns and cumulative abnormal returns for each partnering firm over the period 30 days before to 30 days after the initial announcement date. We calculate cumulative abnormal returns separately over the periods (30, 2), (20, 2),

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(10, 2), (1, 0), (1, 10), (1, 20), and (1, 30) by summing up the daily abnormal returns over the respective periods. The two-day period (1, 0) captures the price reaction to the alliance announcement. The earlier periods capture the anticipation of the information, and later periods show early revisions to the initial reaction of the alliance announcement. We evaluate significance according to t-statistics and Wilcoxon z-statistics. Table II provides estimates of two-day (1, 0) announcement-period abnormal returns to shareholders of U.S. and Japanese partners around the strategic alliance announcement. We find that the U.S. partner shareholders experience a positive average two-day announcement-period abnormal return of 2%, statistically significant at the 1% level. Their median abnormal return is 0.78%, also statistically significant at the 1% level, and 59% of their sample announcement effects are positive. Abnormal returns (not reported) for any other time window preceding or following the announcement period are not statistically significant for the U.S. partners. Our evidence indicates that on average, shareholders of U.S. partners in Japanese-U.S. strategic alliances benefit significantly from the ISA undertaking.

[Insert Table II here]

Table II also shows that shareholders of foreign strategic alliance partners, Japanese firms, also experience gains from ISAs. For the two-day announcement period, the Japanese partner shareholders experience a significantly positive average (median) abnormal return of 0.42% (0.26%), and 55% of their sample announcement effects are

We also re-compute results using an equally weighted index as a proxy for market returns or using alternative periods of data to estimate the parameters of the market model. Results are robust and available from the authors upon request.

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positive. Similar to U.S. partners, Japanese partners do not exhibit significant abnormal returns for any other time window prior to or following the announcement period. We also investigate how the stock market values the international strategic alliance as a whole. We first create a value-weighted daily return series for Japanese and U.S. partner firms, using the partnering firms market values of equity as weights. We then perform an event study on this data series. The results for our 178 Japanese-U.S. strategic alliances indicate that the average (median) two-day announcement-period abnormal return is a statistically significant 0.3% (0.1%), and 55% of the announcement effects are positive. None of the other event-period abnormal returns are statistically significant. Therefore, the ISAs in our sample receive significantly positive abnormal returns. Our results are consistent with Lummer and McConnell (1990), Chen et al. (1991), Crutchley et al. (1991), and Chen, Ho, Lee, and Yeo (2000) for international joint ventures, McConnell and Nantell (1985) and Koh and Venkatraman (1991) for domestic joint ventures, and Chan et al. (1997) and Allen and Phillips (2000) for domestic strategic alliances. We further calculate the dollar value of gains to the shareholders of each of the partnering firms in Japanese-U.S. strategic alliances. Using the two-day (1, 0)

announcement-period abnormal return and the firms market value of equity, we find that at 1998 prices, the average dollar gain to U.S. shareholders is US$34.7 million and the average dollar gain to Japanese shareholders is US$43.4 million. The combined dollar gain for a value-weighted portfolio of U.S. and Japanese partners in the same strategic alliance averages US$56.6 million. Therefore, we conclude that value is created by the formation of ISAs and that there is no evidence of wealth transfers between the U.S. and

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Japanese partners to ISAs. The observed wealth effect in ISAs is due to value creation, not to value appropriation. The sample in this study includes multiple alliances made by some firms, but we treat each announcement as an individual event. This approach can bias our findings. To correct for this potential bias, we first partition the whole sample according to the frequency of Japanese-U.S. alliances made by individual firms. We then re-do the event study by constructing a portfolio of alliances made by the same firm, so that firms with multiple announcements are treated as a single event. We find that for our sample of 164 firms, the average (median) two-day announcement-period abnormal return is 1.64% (0.63%), which is statistically significant at the 1% level. This evidence again indicates that announcements of Japanese-U.S. strategic alliances are associated with significantly positive valuation effects. We also investigate if price responses to successive announcements by the same firm are different from the responses to previous alliance announcements made by these firms. We examine the average two-day announcement-period abnormal returns by the number of alliances. We find that the mean abnormal returns for the first alliance and second alliance are 1.54% and 2.15%, respectively, both of which are statistically significant at the 1% level. However, after the second alliance, all the mean abnormal returns are not statistically significantly different from zero. Our results suggest that more frequent ISA announcements produce weaker stock price responses.

B. Analysis of Subsamples Table III reports the announcement-period abnormal returns to the partnering firms in the Japanese-U.S. strategic alliances, which we obtain by dividing the sample according 21

to the characteristics of firms and alliances. We use t-tests and Wilcoxon signed-rank tests to test the hypotheses that the means and medians are equal to zero. We use t-tests to assess the differences in means between subsamples. To check whether our results are robust to possible deviations from non-normality, we also perform nonparametric Kruskal-Wallis tests. The number of observations in Table III varies due to data availability.

[Insert Table III here]

To investigate the relative size hypothesis, we classify the partnering firms in the same alliance as either the large or small partner, according to their relative firm size. Panel A shows that the small partner subsample has a positive average (median) announcement-period abnormal return of 2.18% (1.11%), which is statistically significant at the 1% level. In contrast, the large partner subsample experiences an insignificant average (median) abnormal return of 0.24% (0%). The mean difference between the abnormal returns for these two groups of partnering firms is 1.94% and is statistically significant at the 1% level. This result is robust to possible deviations from non-normality, since it also holds for the nonparametric Kruskal-Wallis test statistic. Our results support the relative size hypothesis that the stock markets responses to announcements of ISAs are more favorable for the participating firms that are smaller than their alliance partner. Our findings are consistent with McConnell and Nantell (1985) and Koh and Venkatraman (1991) for domestic joint ventures, and Chan et al. (1997) and Das et al. (1998) for domestic strategic alliances, but at odds with Crutchley et al. (1991), who find that larger Japanese partners experience larger announcement gains in the Japanese-U.S. joint ventures.

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Panel B divides the sample by the growth opportunities of the partnering firms in the Japanese-U.S. strategic alliances. We divide our sample according to whether the partnering firms have a Tobins q greater or less than the sample median. High-q firms are those with q above the sample median, and low-q firms are those with q below the sample median.7 We find that high-q partners experience a significantly positive mean (median) announcement-period abnormal return of 1.61% (0.67%). Low-q partners also experience a significantly positive mean (median) abnormal return of 0.62% (0.22%). However, the abnormal returns of high-q partners are significantly higher than those of low-q partners. Our results are consistent with the hypothesis that partnering firms with better growth opportunities receive more wealth gains in ISAs. Similar evidence is documented by Chen et al. (2000) for international joint ventures and Chang and Chen (2002) for domestic joint ventures. In Panel C, we stratify the sample according to whether partnering firms operate in high- or low-tech industries. We find that the announcement-period abnormal returns for the high-tech subsample are positive and statistically significant at the 1% level. However, for the low-tech subsample, the abnormal returns are not significantly different from zero. Furthermore, the mean difference between the abnormal returns for the high- and low-tech subsamples is statistically significant. Our findings support the theoretical prediction that high-tech partners benefit more from ISAs than low-tech partners, consistent with Chan et al. (1997) for domestic strategic alliances. Panel D shows comparisons based on whether the Japanese-U.S. strategic alliance is technical or nontechnical. Following Chan et al. (1997) and Das et al. (1998), technical

Our conclusion remains unchanged when high-q (low-q) firms are those with q above (below) one.

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alliances include licensing agreements, research or development agreements, technology transfer or systems integration agreements, and combinations involving one or more of the above types of agreements, whereas nontechnical alliances consist of marketing and distribution agreements. We find that both technical and nontechnical alliances produce significantly positive announcement-period abnormal returns. A t-test shows that the mean difference between the abnormal returns for the technical and nontechnical subsamples is statistically significant at the 10% level. However, this result does not hold for the nonparametric Kruskal-Wallis test statistic. Therefore, our evidence does not provide strong support for the hypothesis that technical ISAs involving the possible transfer or pooling of technological knowledge add more value to the partnering firms than do nontechnical/marketing ISAs. Our results are in contrast to Das et al. (1998) for domestic strategic alliances, who find that the stock market rewards technical alliances more than marketing alliances. Panel E stratifies the sample according to whether partnering firms in the same Japanese-U.S. strategic alliance are from related businesses. We define related alliances as those between firms in the same four-digit SIC code.8 We find that partnering firms in the related alliances do not experience significant announcement-period abnormal returns, but those in the unrelated alliances experience significantly positive abnormal returns. However, the abnormal returns for these two subsamples are not significantly different at the conventional levels. Therefore, we find no strong support for the hypothesis that the wealth effect of ISAs depends on partners business relatedness, probably because of their ambiguous relation as described above. Our evidence is consistent with Merchant and

24

Schendel (2000) for international joint ventures, but inconsistent with Chan et al. (1997), who document that horizontal domestic strategic alliances produce stronger market reactions. In Panel F, we divide the sample firms by their previous experience in cross-border interfirm collaboration. As suggested by Gupta and Misra (2000), the experience of cooperating with foreign partners from any country may be valuable for our sample firms when they form Japanese-U.S. strategic alliances. Using data from SDC, we define experienced firms as those with at least one international non-equity alliance or joint venture with partners from foreign countries within five years preceding the announcement date.9 We find that both experienced and inexperienced firms exhibit significantly positive announcement-period abnormal returns. The mean difference between the abnormal returns for these two subsamples is not statistically significant.10 Therefore, our results do not support the hypothesis that ISAs add more value for experienced partnering firms. Our evidence is consistent with Merchant and Schendel (2000) for international joint ventures, but at odds with Gupta and Misra (2000), who find that prior experience increases value in international joint ventures. In Panel G, we divide the partnering firms in Japanese-U.S. alliances into high- and low-profitability groups. High-profitability firms are those whose profitability ratio is

We obtain similar results if we define related alliances as those between firms in the same two- or three-digit SIC code. 9 Using cut-off numbers other than one or pre-announcement periods other than five years to distinguish between experienced and inexperienced firms does not result in any change in our conclusion. 10 A higher abnormal return for inexperienced firms does not necessarily suggest that experience may hurt a firm. Firms with greater experience from ISAs and IJVs may have a higher capability in managing cross-border interfirm collaboration, and thus are expected to have more favorable market responses. However, the degree of surprise may be smaller when the ISA announcements are made by firms that have a history of making frequent ISA announcements. Considering all these arguments together, the relation between prior experience in international collaboration and the wealth effect of ISAs would be ambiguous.

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above the sample median, and low-profitability firms are those whose profitability ratio is below the sample median. We find that both high- and low-profitability firms experience significantly positive announcement-period abnormal returns. Furthermore, the abnormal returns are significantly higher for low-profitability firms than for high-profitability firms. Our findings support the hypothesis that wealth gains in ISAs are smaller for the partnering firms with higher profitability, consistent with Das et al. (1998) for domestic strategic alliances.11 To test the currency strength hypothesis, the /$ exchange rate of the month of each Japanese-U.S. alliance announcement is first ranked from lowest to highest and sorted into two equal groups: /$ high and /$ low. We then classify announcement-period abnormal returns to shareholders of alliance partners according to whether their home currency is relatively strong. Panel H shows that the abnormal returns for partners with strong home currencies are not significantly different from those with weak home currencies. Our results do not support the hypothesis that shareholder gains in ISAs depend on the strength of the partnering firms domestic currency. Our evidence is in contrast to Crutchley et al. (1991), who show that wealth gains in international joint ventures are larger when the partners domestic currency is relatively strong.

C. Cross-Sectional Regression Analysis Although the univariate results in Table III support the notion that announcements of Japanese-U.S. strategic alliances have significant valuation effects that are influenced by various characteristics, the tests do not capture the possible interaction among the

11

We also measure profitability by using return on sales and industry-adjusted ratios. The results do not alter our conclusions.

26

characteristics we examine. A multivariate analysis incorporates the interaction between these variables and captures the overall effect of the distinguishable characteristics that affect the wealth effect of the alliances. To further examine the effect of these factors, we estimate a multivariate cross-sectional regression of the announcement-period abnormal returns to the partnering firms. We estimate the regression using weighted least squares, with the weights equal to the inverse of the standard deviation of the market-model residual. We use this procedure to obtain efficient estimates, since the variances of the market-model residuals vary across announcers (Lang, Stulz, and Walkling, 1991). Table IV presents cross-sectional regression analyses of the announcement-period abnormal returns for the sample.12 Model 1 includes all the potential explanatory variables. We define relative size as the announcing firms size divided by its partners size.13 The high-tech industry dummy equals one for partners that operate in high-tech industries, and zero otherwise. The technical-alliance dummy equals one if alliances include licensing agreements, research or development agreements, technology transfer or systems integration agreements, and combinations involving one or more of the above types of agreements, and zero otherwise. The business relatedness dummy equals one if all the partners in the same alliance have the same four-digit SIC code, and zero otherwise. We measure previous experience by the number of both international non-equity alliances and joint ventures with partners from foreign countries within five years preceding the announcement date. 14 The currency strength dummy equals one when the partners

The number of observations in Table IV is smaller because of some missing data. Our results are similar if we use a dummy variable that takes a value of one for partners with a relatively large firm size, and zero otherwise. 14 Our results are similar if we use a dummy variable to distinguish between experienced and inexperienced firms as defined above.
13

12

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domestic currency is relatively strong, and zero otherwise. Growth opportunities and profitability are respectively measured by q and NI/assets as described above.

[Insert Table IV here]

Model 1 shows that the partnering firms share price responses are significantly negatively related to the relative size variable. This finding is consistent with the result in Table III. ISAs with larger partnering firms provide important benefits to small partners by getting access to those resources that are otherwise not available. Cooperation with large partners may also confer on small partners social legitimacy that could provide valuable access to the resources outside of ISA partners, such as the chance to participate in international networks that provide valuable information, or to gain better legitimacy within the networks. Therefore, the stock markets responses to announcements of ISAs are more favorable for the participating firms that are smaller than their alliance partner. Model 1 also shows that the partnering firms share price responses are significantly positively related to the q variable, consistent with the finding in Table III.15 The organizational flexibility inherent in ISAs facilitates experimentation with new combinations of participants in the pursuit of sustainable growth under great uncertainty. The ability to experiment is particularly valuable to rapidly growing firms. Therefore, partnering firms with high growth potential receive more wealth gains from ISAs than do those firms with limited growth opportunities.

The finding that the price response is positively related to the firms q may result from high-q firms partnering with other high-q firms. We do not find such evidence. The mean difference between the abnormal returns for high-q and high-q partners versus high-q and low-q partners is statistically insignificant at the conventional levels.

15

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Consistent with our earlier results in Table III, Model 1 shows that the partnering firms share price responses are significantly negatively related to its return on assets.16 More profitable firms have less need to engage in the risks of multinational activity, which makes the risk-reward ratio for ISAs less favorable for these firms. Therefore, value gains in ISAs are smaller for the partnering firms with higher profitability. Model 1 shows that the partnering firms share price responses are not significantly affected by the high-tech industry dummy, the technical-alliance dummy, the business-relatedness dummy, the previous experience variable, and the currency strength dummy. The results suggest that these factors are relatively unimportant in assessing the valuation effects of Japanese-U.S. strategic alliances. In Model 2, we include several additional explanatory variables. A low-q firms ISA with a high-q firm may be more advantageous for the low-q firm than for the high-q firm, because the former has fewer opportunities and partnering with a high-q firm improves the opportunity set. In Model 2, we include an interaction variable between the relative q dummy and announcing firms q. The relative q dummy equals one when the announcing firms q level is lower than its partners q level, and zero otherwise. Transferring production between countries in response to foreign exchange movements may work better if both firms in ISAs are large enough, in the sense that they both have substantial production capacity. We test whether the currency strength

hypothesis holds for partnering firms that are both relatively large, defined by whether the market value of equity 30 days before the announcement is greater than the sample median. In Model 2, we add an interaction term between the currency strength dummy and the large
16

The results are similar if we measure profitability by return on common equity or operating cash flows

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partners dummy. The larger partners dummy is equal to one when an ISA involves two large partners, and zero otherwise. ISAs between two partnering firms can be one-way or two-way. In two-way alliances, two partnering firms agree to employ each others technology or know-how, or to sell each others products. One-way alliances allow only one partnering firm to use the others technology or know-how, or to sell the others products. Two-way alliances may generate different price responses for the partners than one-way alliances. We classify our sample of ISA announcements as one-way or two-way, using the information from the WSJ articles. Of our 178 announcements, 99 are one-way and 79 are two-way. To examine if price responses are different between one-way and two-way alliances, we add the two-way alliance dummy in Model 2, where the dummy variable is equal to one for two-way alliances, and zero otherwise. Das et al. (1998) argue that more profitable firms are likely to be first-movers, and opportunistic behavior by the partner can reduce value gains to first-movers. Such opportunistic behavior is less likely to occur in two-way ISAs compared to one-way ISAs. To compare the differential profitability-price reaction relation for one-way and two-way ISAs, in Model 2 we include an interaction variable between profitability and the two-way alliance dummy. Since the sample period spans both a recession and a bull market, our results could be affected by differing market conditions. To control for this possibility, we include year dummies in Model 2. We also include a country dummy in Model 2 to control for the

deflated by total assets, where operating cash flows are defined as operating income less capital expenditures.

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effects of country-specific differences. The country dummy is equal to one for the U.S. partnering firms, and zero otherwise. Model 2 shows that shareholders still earn significantly larger abnormal returns in Japanese-U.S. strategic alliances when the partnering firms have a relatively small size, higher growth opportunities, or less profitability. In addition, we find that the coefficient of the interaction variable between profitability and the two-way alliance dummy is significantly positive. This evidence suggests that more profitable firms are less likely to suffer from first-mover disadvantages in two-way ISAs. Model 2 also shows that the rest of the potentially influential variables, including the other additional explanatory variables, are relatively unimportant in assessing the valuation impact of ISAs. The findings in Table IV might be biased, because we treat each announcement as a unique data point and give extra weight to firms that engage in multiple ISAs. To address this concern, we re-estimate the regressions on the sample that includes only the first ISA announcement by each firm. Although not reported, the results from this sample are qualitatively similar and our conclusions remain unchanged.

IV. Operating Performance for Partners Subsequent to Alliances The operating performance of alliance partners surrounding announcements provides additional evidence on the economic impact of ISAs. ISAs may have a significant impact on the operating performance of partners through various channels. First, ISAs represent an important strategy to effectively penetrate unfamiliar or entrenched foreign markets. Sales gained from foreign markets can make an important contribution to the firms operating performance. The three examples in Appendix Section D, the alliances of

31

Cray Research with Hitachi in 1989, HP with Oki Electric Industry in 1992, and Wal-Mart with Ito-Yokado in 1994, illustrate the advantages of these strategies. Second, ISAs can improve partners operating performance by enhancing competitive advantages. Some of the advantages may include establishing industry or market standards, and pre-emptive patenting for deterring rivals entry. In Appendix Section E, the alliances of Motorola with Fujitsu in 1995, 3DO with Matsushita Electric Industrial in 1995, and Microsoft with Sony in 1998 provide examples of such an advantage. ISAs may affect partners operating performance by providing access to technology and resources that are not commonly found in market transactions. At the same time, ISAs may reduce the uncertainty and costs of resources investment associated with full-scale internalization. We provide several examples in Appendix Section F, including the alliances of Matsushita Electric Industrial with Sun Microsystems in 1990, Hitachi with TRW in 1991, and PictureTel with Nippon Telegraph and Telephone in 1995. Following Jain and Kini (1994), Chan et al. (1997), and Freund, Prezas, and Vasudevan (2003), we use the following four ratios to measure the operating performance of each partnering firm in a Japanese-U.S. strategic alliance: 1) operating return on assets, which we define as the ratio of operating income before depreciation to assets (OIBD/assets); 2) operating cash flows, which we define as operating income less capital expenditures, deflated by total assets (OCF/assets); 3) return on assets, which we define as NI/assets; and 4) asset turnover, which equals net sales over total assets.17 We obtain our data from Compustat and Datastream.

17

The results are similar if we deflate the first three measures of operating performance by net sales.

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We examine the operating performance of the partnering firm in the alliance announcement year (year 0) and over the three-year period before and after the announcement year (years 3 to 1 and years +1 to +3). To measure the change in its operating performance surrounding the alliance, we also compare the partnering firms performance variables in year 0 with the variables in years -3 to -1 and with those in years +1 to +3. To control for both industry and size effects, we adjust the change in the performance variables by subtracting from the announcing firms change the matching firms change over the same period. The matching firm has the closest firm size, measured by the market value of equity 30 days before the announcement, among the firms with the same four-digit SIC code as the announcing firm. Table V presents the industry-and-size-adjusted changes in operating performance of partnering firms surrounding Japanese-U.S. strategic alliances. We use t-tests and Wilcoxon signed-rank tests to test the hypotheses that the means and medians are equal to zero. The number of observations varies according to availability.

[Insert Table V here]

In year 0, U.S. partners perform better than their matching firms, according to the mean and median industry-and-size-adjusted OIBD/assets, OCF/assets, NI/assets, and sales/assets. Our findings suggest that U.S. firms that enter into ISAs outperform their matching firms in the year of the ISA formation. In contrast, in year 0 Japanese partners do not display either superior or inferior operating performance relative to their matching firms.

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Prior to the announcement of ISAs, both U.S. and Japanese partners in the sample generally experience no significant changes in operating performance. All measures of mean and median changes in operating performance between year 0 and years 3, 2, and 1 are statistically insignificantly different from zero. The exception is Japanese partners showing that their median change in OIBD/assets between year 0 and year 3 and their median change in OCF/assets between year 0 and year 1 are marginally negative at the 10% level. Therefore, we find no evidence that performance either improves or deteriorates in the years prior to the formation of ISAs, consistent with the findings for domestic strategic alliances in Chan et al. (1997). The U.S. partners in the sample experience significant improvements in operating performance after a strategic alliance with Japanese firms. All measures of mean and median changes in operating performance between year 0 and years +1, +2, and +3 are positive and mostly statistically significant at the 10% level or better. The Japanese partners also show a similar trend in improving operating performance subsequent to the alliance. Our evidence is in contrast to Chan et al. (1997), who find that partnering firms do not experience significant changes in operating performance following a domestic strategic alliance. In our sample, since different partnering firms engage in differing numbers of ISAs, it is likely that in many cases the post-announcement period includes the announcement of a subsequent ISA. Such overlaps could bias the findings reported in Table V. To examine the importance of such a bias, we estimate changes in operating performance for a sample that comprises only firms that announce a single ISA during our study period. Although not reported, the results from this sample are similar to those in Table V.

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For the ISA to have a significant impact on operating performance, it must not only constitute a significant change in sales/assets, but must also survive for at least several years. Panel D of Table V and the three examples in Appendix Section G (the alliances of Software Toolworks with Nintendo in 1990, IBM with Hitachi in 1991, and Fujitsu with Oracle in 1997) show a significant impact on the partners sales/assets resulting from ISAs.18 Previous studies also document that ISAs can survive for at least several years. In an in-depth analysis of 227 cross-border alliances involving partnering firms from North America, Western Europe, or Asia, Dussauge, Garrette, and Mitchell (2000) show that these alliances on average survive at least 6.8 years. Simonin (1999) also document similar results. We also note that our findings on changes in operating performance following the announcement of an ISA may not necessarily lead to the conclusion that the ISAs themselves result in significant improvements in operating performance. To reach this conclusion, we would need to have a detailed analysis of the impact of each alliance on sales and other operating measures for each of the partners. However, the availability of the data does not allow us to conduct such a detailed analysis. We can only present limited cases that show the positive influence of ISAs on operating performance. The results in Table V also suggest other explanations. One such explanation is that firms that get involved in ISAs are either better, or no worse, than other firms in their industry, and that such a trend in operating performance continues after the ISA is announced.19

18

We also examine sales growth, which we define as the percentage change in net sales, following the announcement of Japanese-U.S. strategic alliances. Industry-and-size-adjusted figures show that both U.S. and Japanese partners in the sample experience a significant increase in sales subsequent to the formation of ISAs. 19 We are grateful to the referee for providing this alternate explanation.

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V. Conclusion In this study, we provide evidence on the wealth effect of international strategic alliances that do not involve equity ownership. We do so by examining a sample of Japanese-U.S. alliances. We show that on average, both Japanese and U.S. shareholders benefit from the formation of international alliances. Our findings suggest that international strategic alliances produce a positive wealth effect for the combined partnering firms, with no evidence of wealth transfers between partners. We also relate the partnering firms share price responses in the Japanese-U.S. alliances to the characteristics of firms and alliances. We find that the

announcement-period abnormal returns to the partnering firms are significantly negatively related to their relative firm size and profitability, and are significantly positively related to their growth opportunities. We further show that two-way international strategic alliances mitigate the negative impact of profitability on the partnering firms price reactions. We also examine the operating performance for partnering firms surrounding announcements of Japanese-U.S strategic alliances. We show that both Japanese and U.S. partnering firms experience significant improvements in operating performance over the three-year period following the formation of international strategic alliances.

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Appendix: Sample Description of International Strategic Alliances (ISAs)

A. ISAs Between Firms of Unequal Size 1. On April 12, 1994, 3DO Co. announced that Toshiba Corp., a Japanese electronics multinational firm about 43 times as large as 3DO, signed an agreement with 3DO to make, market, and distribute 3DO products. Toshiba planned to develop a portable navigation system unit that could be installed in automobiles, using 3DO technology. This plan was backed by other multinational firms including Matsushita Electric Industrial Co., American Telephone & Telegraph Co., and Time Warner Inc. 2. On June 8, 1994, Silicon Graphics Inc. announced that it had signed an agreement with Nippon Telegraph & Telephone Corp. (NTT), which was 42 times as large as Silicon. Under this partnering, Silicon planned to provide video servers and other multimedia technology to NTT for use in interactive video in the Japanese markets. B. Marketing ISAs Between Firms in Unrelated Sectors 1. Canon Sales Co., the distributor of cameras, business machines, and other products made by Canon Inc. of Japan, announced on February 5, 1991 that it had concluded a marketing agreement with Cray Research Inc., a U.S. supercomputer maker. Under the accord, Canon Sales sold Cray Researchs supercomputer Y-MP2E system in Japan. 2. On July 17, 1997, Abbott Laboratories reached a strategic alliance with Toshiba Corp. under which Abbott distributed blood analyzers developed and made by the Japanese company. The partnership allowed Abbott to substantially expand its presence in clinical chemistry over time through the exclusive distribution rights for the analyzers everywhere but Japan, South Korea, and Taiwan. 3. On July 15, 1992, NEC Corp. reached an agreement with Motorola Inc. to jointly sell components for a digital portable telephone system in Asia. The companies each took orders for the system, with NEC making the switchboard components and Motorola the radio components. 4. On August 31, 1993, Amgen Greater Ltd. and Kirin Brewery Co. entered into a joint agreement for the sale of biopharmaceuticals to China. Under the agreement, the companies sold a single line of recombinant human erythropoietin products stimulating blood cells made by Amgen and the other line of recombinant human granulocyte colony stimulating factor products made by Kirin. 5. On August 27, 1990, International Business Machines Corp. signed an agreement with Pioneer Electronic Corp. to market Pioneers laser disk players to corporate clients in the U.S. Under the agreement, Pioneer provided industrial disk players to hook up with IBM computers, and IBM adapted its graphics software to operate on Pioneers machines. Although Pioneer was the leading maker of disk players, about 95% of its 37

sales were for home use. With IBMs software technology, Pioneer made greater gains in the industrial market. C. ISAs Involving Licensing Agreements 1. On October 21, 1991, Isis Pharmaceuticals Inc. announced that it had granted Eisai Co. an exclusive license for the marketing in Japan of Isis 1082, a drug for the treatment of ocular and genital herpes infections. Isis in return received a licensing fee and performance payments from Eisai. 2. On November 19, 1991, Johnson and Johnson announced a world-wide licensing agreement to develop and co-market a new antibiotic compound discovered by Fujisawa Pharmaceutical Co. of Japan. The agreement provided Johnson and Johnson with the right to develop and co-market the new antibiotic compound world-wide, except in Japan, South Korea, Taiwan, China, and the Soviet Union, where Fujisawa retained exclusive rights. 3. On September 27, 1994, Sony Corp. signed a licensing agreement with StarSight Telecast Inc. to use the companys on-screen, interactive television program guide in its consumer electronics products. 4. On February 24, 1995, Research Frontiers Inc. entered into a licensing agreement with Sanyo Electric Co. of Japan to allow Sanyo to make and sell flat-panel displays for computers and televisions using Research Frontiers technology. Under the agreement, Sanyo paid Research Frontiers a royalty of 5% of the net sales of licensed products. 5. On April 21, 1994, Japanese electronics maker Toshiba Corp. and disk-drive maker Seagate Technology Inc. announced a cross-licensing accord for magnetic storage devices. The pact let each company use a number of magnetic mass-storage technologies covered by the others patents. 6. On June 16, 1994, MGI Pharma granted Kissei Pharmaceutical an option to acquire a license for all rights to develop, manufacture, and market Salagen Tablets in Japan. D. ISAs for International Expansion 1. On July 24, 1989, supercomputer makers Cray Research and Hitachi reached a cross-licensing agreement as part of Crays push into the Japanese markets. This alliance strengthened Crays competitive posture by enhancing its networking capabilities to interface with entrenched Japan vendors. 2. On April 8, 1992, Hewlett-Packard announced a strategic alliance to supply for resale $80 million worth of computers to Oki Electric Industry Co. over three years. Through Oki, HP hoped to tap into Japans rich telecommunications market, currently dominated by domestic suppliers.

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3. On March 24, 1994, Japanese supermarket giant Ito-Yokado Co. announced an agreement with U.S. retail conglomerate Wal-Mart Stores Inc. that allowed Ito-Yokado to import low-cost Wal-Mart goods. Aside from the 143 general-merchandise stores Ito-Yokado ran under its own name, the company also controlled Seven-Eleven Japan, one of Japans most successful convenience-store chains. For its part, Wal-Mart gained access to one of Japans most entrenched and sophisticated retail networks. E. ISAs for Enhancement of Competitive Advantages 1. On April 21, 1995, Motorola Inc. agreed to create a common standard with Fujitsu Ltd. of Japan for a wireless alternative to ordinary telephone service. The agreement held out the possibility that other makers of telephones and related equipment adopted a common approach to wireless telephone service designed to satisfy the needs of non-mobile callers. 2. On October 25, 1995, 3DO Co. agreed to license its next-generation video-game technology, M2, to Japans Matsushita Electric Industrial Co. In turn, Matsushita got to sublicense the technology to other companies as well as applied it itself. New players based on the technology were expected to hit the U.S. market in the latter half of 1996, intensifying a war of advanced players being waged by 3DO, Sega Enterprises Ltd., Sony Corp., and Nintendo Co. The industry was undergoing a transition from an aging fleet of 16-bit game players to ones using 32 and 64 bits of computing power. The M2 technology was considered among the most advanced of all. Thus, 3DO aimed to use multi-year pre-emptive patenting and licensing to erode competitors positions in this promising technology. 3. On April 8, 1998, Microsoft Corp. and Sony Corp. announced a strategic alliance to link personal computers and consumer-electronics devices, thus moving the two companies closer together on technology standards for digital television and other consumer products. Microsoft licensed software from Sony which was used with the networking technology, and used the software with versions of Windows CE that Microsoft was trying to make a standard for non-PC products. Sony, in turn, licensed Windows CE for use in certain products. Thus, new standards for integrated consumer products were created through the mutual licensing on technology. F. ISAs for Getting Access to Technology and Resources 1. On December 6, 1990, Matsushita Electric Industrial Co., eager to bolster its minuscule computer business, signed an agreement with Sun Microsystems to co-develop a new line of high-performance machines. Under the agreement, Matsushita got a license to build machines based on the leading U.S. makers Sparc microprocessor, operating system, and a collection of software. Matsushitas decision was significant for Sun, which was seeking allies to become the de facto standard in the growing market for powerful desktop machines. Matsushitas endorsement brought this technology to an even broader marketplace. On the other hand, this partnership also benefited Matsushita.

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This platform allowed Matsushita to develop products quickly and be assured of a large and growing market. 2. On July 26, 1991, Hitachi Ltd. and TRW Inc. formed a strategic alliance to pursue opportunities in space technologies. TRW was one of the top space suppliers in the U.S., but had a minimal presence in Japan compared to other U.S. competitors such as General Electric Co. and Hughes Aircraft. While Hitachi was one of Japans largest electronics companies, it had only a tiny space business compared with Japanese competitors NEC Corp., Toshiba Corp., and Mitsubishi Electric Corp. 3. On May 10, 1995, PictureTel Corp., the global videoconferencing company, and Nippon Telegraph and Telephone (NTT), the worlds largest telecommunications company, announced a contractual collaboration on the development of a videoconferencing system for the Japanese markets. NTT was in charge of reselling Phoenix, an ISDN-based desktop videoconferencing system developed by PictureTel, to both business and consumer customers in Japan. PictureTel also completed the worlds largest multipoint videoconferencing network for NTT, which could handle videoconferences of up to 1,000 sites or more, connecting more than 50,000 attendants from up to 1,000 or more sites in Japan and the United States. G. ISAs Showing a Profound Impact on the Partners Revenues 1. On September 11, 1990, Software Toolworks, a developer and publisher of entertainment and personal productivity computer software, and Nintendo Corp. initiated an alliance. Software Toolworks received a license from Nintendo to market Nintendo Entertainment System in Japan. In the following year, Software Toolworks announced the marketing of Nintendos series of Entertainment System. One year after the initial announcement of the alliance pact, Software Toolworks announced its return to profitability. It reported revenue of $22.2 million and net income of $1.18 million or $0.05 per share for its fiscal second quarter ended September 30, 1991. For the comparable quarter in the previous fiscal year, the company reported revenue of $14 million and a net loss of $7 million or $0.31 per share on a restated basis. Revenues for the September 1991 quarter increased 59% over the comparable quarter last year. 2. On December 26, 1991, IBM and Hitachi agreed that Hitachi would buy at least 2,000 computers a month beginning in April to sell under its own name in Japan. The collaboration went smoothly in that IBM expanded its share in the Japanese market, nearly doubling from 6.8% to 10.1% in 1994; at the same time, Hitachis share in the PC market rose from 0.9% to 2.7%. 3. On August 22, 1997, Fujitsu Ltd., a major Japanese computer maker, entered into an alliance with U.S. database software company Oracle Corp. to sell and install computer systems running Oracles software in 12 Asian-Pacific markets. The alliance had an important impact on Fujitsus operations in that Fujitsus revenues from systems running Oracle software accounted for about 150 billion of its 1.54 trillion in annual

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domestic information services sales (9.74%), and it was expected to double in the following two years after continuing this cooperation.

41

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Table I. Sample Distribution of Japanese-U.S. Strategic Alliances

This table presents the sample distribution of announcements of 178 Japanese-U.S. strategic alliances from 1989 to 1998. We obtain our sample from the Securities Data Corporations (SDC) Worldwide Merges, Acquisitions, and Alliances database. We measure firm size by the market value of equity 30 days before the announcement. We base the industries in our sample on the primary four-digit SIC code in Datastream. For ease of comparison, we convert the measure of firm size to 1998 dollars using the Consumer Price Index from IMFs International Financial Statistics. We base our sample distribution by type of cooperative agreement on SDCs classification scheme and the sample distribution by industries on Business Weeks classification scheme. Relative size is the announcers firm size divided by its partners. We use a simple measure of Tobins q to estimate the announcing firms growth opportunities: the average ratio of the market to book value of the firms assets for three years preceding the announcement, where the market value of assets equals the book value of assets minus the book value of common equity plus the market value of common equity. The high-tech industry dummy equals one for partners that operate in high-tech industries, and zero otherwise. We measure previous experience by the number of both international non-equity alliances and joint ventures with partners from foreign countries within five years preceding the announcement date. We measure profitability by the ratio of net income to assets for the fiscal year prior to the announcement. We assess differences in means and medians using t-tests and Wilcoxon rank-sum tests, respectively.

Panel A. Sample Distribution by Year

Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Total Number of Announcements 20 14 11 10 9 8 7 6 5 4 3 2 1 Total Number of Firms 1 1 2 1 2 1 2 4 3 6 10 26 105 164 Number of Announcements 8 15 25 28 25 27 21 10 10 9 178 Percent of Sample 4.5 8.4 14.0 15.7 14.0 15.2 11.8 5.6 5.6 5.1 100.0

Panel B. Sample Distribution by Frequency

Illustrative Company U.S. Japan Hitachi Toshiba IBM NEC Sony Texas Instruments Fujitsu Mitsubishi Electric Microsoft Sanyo Electric Motorola; HP Nippon Telegraph & Telephone; Matsushita Sun Microsystems; AT&T Canon Eastman Kodak; Apple; Kirin Brewery Intel National Semiconductor; Toyota; GE Sharp GM; Dell Mitsubishi Heavy Industries; Nippon Steel Johnson & Johnson; All Nippon Airways; Wal-Mart NKK

47

Table I (Continued) Panel C. Market Value of Equity of Alliance Partner (in millions of dollars)
U.S.: Partnering firm Industry Mean 16,838 521 17,998 7,463 Number of Announcements 44 34 30 58 12 178 Number of Participating Firms 7 153 44 46 24 274 Median 4,738 88 12,290 1,523 Percent of Sample 24.7 19.1 16.9 32.6 6.7 100.0 Percent of Participating Firms 2.0 43.0 12.4 12.9 6.7 77.0

Japan: Partnering firm Industry

Panel D. Sample Distribution by Type of Cooperative Agreement

Strategic Purpose I. Licensing II. Development or research III. Technology transfer or systems integration IV. Marketing or distribution V. Various combinations of I-IV Total

Panel E. Sample Distribution by Industry

Industry High-technology group: Aerospace Computers, information technology, and software Pharmaceuticals Semiconductors and electrical equipment Telecommunications s High-tech subtotal Low-technology group: Air transportation Chemicals and allied products Food and kindred products Machinery and equipment Motor vehicle and auto bodies Paper and allied products Photographic equipment Rubber and miscellaneous plastic products Services Wholesale and retail goods Miscellaneous Low-tech subtotal Grand total

4 4 8 18 12 2 5 5 8 5 11 82 356

1.1 1.1 2.2 5.1 3.4 0.6 1.4 1.4 2.2 1.4 3.1 23.0 100.0 Difference Mean Median -12.71*** -2.01*** 1.48*** 0.17*** 0.10** 0.00** -17.52*** -11.50*** -1.61 2.01***

Panel F. Summary Statistics

Variables Relative size Growth opportunities High-tech industry dummy Prior experience Profitability (%)
***Significant at the 0.01 level. **Significant at the 0.05 level.

U.S. Firms Mean Median 2.37 0.41 3.05 1.52 0.82 1.00 9.56 4.00 1.41 4.84

Japanese Firms Mean Median 15.08 2.42 1.57 1.35 0.72 1.00 27.08 15.50 3.02 2.83

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Table II. Two-Day Announcement-Period Abnormal Returns Associated with Japanese-U.S. Strategic Alliances
This table presents two-day (-1, 0) announcement-period abnormal returns of the partnering firms surrounding the announcements of 178 Japanese-U.S. strategic alliances from 1989 to 1998. Day 0 is date of the announcement in The Wall Street Journal. We estimate two-day announcement-period abnormal returns by using the standard market model procedure, with parameters estimated for the period 200 days to 60 days before the announcement. To compute combined abnormal returns, we first create a value-weighted daily return series for both Japanese and U.S. partnering firms in the same alliance, using the partnering firms market values of equity as weights. We then perform an event study on this data series. We use t-tests and Wilcoxon signed rank tests to test the hypotheses that the means and medians are equal to zero, respectively.

Mean Abnormal Return (%)

U.S. partners Japanese partners Combined Japanese-U.S. partners
***Significant at the 0.01 level. **Significant at the 0.05 level. *Significant at the 0.10 level.

Median Abnormal Return (%)

0.78*** 0.26** 0.10*

Standard Deviation (%)

5.88 2.22 1.84

First Quartile (%)

-1.06 -0.81 -0.97

Third Quartile (%)

3.68 1.68 1.45

Range (%)
41.37 15.76 12.45

2.00*** 0.42** 0.30**

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Table III. Announcement-Period Abnormal Returns for Subsamples of Japanese-U.S. Strategic Alliances Grouped by Various Characteristics
This table presents the announcement-period abnormal returns to partnering firms in the Japanese-U.S. strategic alliances, which we obtain by dividing the sample according to the characteristics of firms and alliances. We classify the partnering firms in the same alliance as either the large or small partner according to their market value of equity 30 days before the announcement. We measure q by the average ratio of the market to book value of the firms assets for three years preceding the announcement, where the market value of assets equals the book value of assets minus the book value of common equity plus the market value of common equity. High-q firms are those with q above the sample median. High- versus low-tech industry classifications are based on SIC codes and Business Weeks classification scheme. Technical alliances include licensing agreements, research or development agreements, technology transfer or systems integration agreements, and combinations involving one or more of the above types of agreements. Nontechnical alliances consist of marketing and distribution agreements. Related alliances are those alliances between firms in the same four-digit SIC code. Experienced firms are those alliances with at least one international non-equity alliance or joint venture with partners from foreign countries within five years preceding the announcement date. We measure profitability by the ratio of net income to assets for the fiscal year prior to the announcement. High-profitability firms are those with the profitability ratio above the sample median. The /$ exchange rate of the month of each Japanese-U.S. alliance announcement is first ranked from lowest to highest and sorted into two equal groups: /$ high and /$ low. We then classify announcement-period abnormal returns to shareholders of alliance partners according to whether their home currency is relatively strong. For each cell, we report the mean abnormal return, the median abnormal return, and, in parentheses, the t-statistic, the p-value for the Wilcoxon z-statistic, and the number of observations. For the comparison of means, we report mean difference, the t-statistic in parentheses assuming unequal variances, and the p-value for the non-parametric Kruskal-Wallis statistic in square brackets. The results are similar with the assumption of equal variances. The number of observations varies because of data unavailability.

Panel A. Partners Relative Size

Large Mean abnormal return = 0.24% Median abnormal return = 0.00% (1.58, 0.43, 178) High q Mean abnormal return = 1.61% Median abnormal return = 0.67% (4.22***, < 0.01, 168) High-Technology Industry Mean abnormal return = 1.55% Median abnormal return = 0.55% (5.27***, < 0.01, 274) Technical Alliances Mean abnormal return = 1.48% Median abnormal return = 0.42% (4.58***, < 0.01, 240) Small Mean abnormal return = 2.18% Median abnormal return =1.11% (4.95***, < 0.01, 178) Low q Mean abnormal return = 0.62% Median abnormal return = 0.22% (2.52**, 0.06, 168) Low-Technology Industry Mean abnormal return = 0.10% Median abnormal return = -0.13% (0.31, 0.90, 82) Mean Difference -1.94% (-4.17)*** [< 0.01] Mean Difference 0.99% (2.17)** [0.07] Mean Difference 1.45% (3.41)*** [0.02] Mean Difference 0.83% (1.90)* [0.35]

Panel B. Growth Opportunities

Panel C. Industry Affiliation

Panel D. Alliance Type

Nontechnical Alliances Mean abnormal return = 0.65% Median abnormal return = 0.34% (2.24**, 0.09, 116)

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Table III (Continued) Panel E. Business Relatedness

Related Mean abnormal return = 0.63% Median abnormal return = -0.04% (1.36, 0.63, 50) Experienced Mean abnormal return = 1.08% Median abnormal return = 0.32% (4.16***, < 0.01, 305) High Mean abnormal return = 0.76% Median abnormal return = 0.17% (2.62***, 0.08, 176) Strong Mean abnormal return = 0.95% Median abnormal return = 0.63% (4.02***, < 0.01, 178)
***Significant at the 0.01 level. **Significant at the 0.05 level. *Significant at the 0.10 level.

Unrelated Mean abnormal return = 1.31% Median abnormal return = 0.42% (4.89***, < 0.01, 306) Inexperienced Mean abnormal return = 2.03% Median abnormal return = 0.97% (3.27***, < 0.01, 51)

Mean Difference -0.68% (-1.27) [0.19] Mean Difference -0.95% (-1.41) [0.12] Mean Difference -0.90% (-1.89)* [0.08] Mean Difference -0.53% (-1.10) [0.50]

Panel F. Prior Experience in International Collaboration

Panel G. Profitability
Low Mean abnormal return = 1.66% Median abnormal return = 0.61% (4.40***, < 0.01, 176) Weak Mean abnormal return = 1.48% Median abnormal return = 0.18% (3.55***, 0.02, 178)

Panel H. Home Currency Strength

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Table IV. Cross-Sectional Regression Analyses of Factors Affecting Announcement-Period Abnormal Returns to Partnering Firms in the Japanese-U.S. Strategic Alliances
This table presents cross-sectional regression analyses of announcement-period abnormal returns to partnering firms in the Japanese-U.S. strategic alliances. Relative size is the announcers firm size divided by its partners. We measure firm size by the market value of equity 30 days before the announcement. We use a simple measure of Tobins q to estimate the announcing firms growth opportunities: the average ratio of the market to book value of the firms assets for three years preceding the announcement, where the market value of assets equals the book value of assets minus the book value of common equity plus the market value of common equity. The relative q dummy equals one when the announcing firms q level is lower than its partners, and zero otherwise. The high-tech industry dummy equals one for partners that operate in high-tech industries, and zero otherwise. The technical-alliance dummy equals one if alliances include licensing agreements, research or development agreements, technology transfer or systems integration agreements, and combinations involving one or more of the above types of agreements, and zero otherwise. The business relatedness dummy equals one if all the partners in the same alliance have the same four-digit SIC code, and zero otherwise. We measure previous experience by the number of both international non-equity alliances and joint ventures with partners from foreign countries within five years preceding the announcement date. We measure profitability by the ratio of net income to assets for the fiscal year prior to the announcement. The two-way alliance dummy is equal to one for two-day alliances, and zero otherwise. The currency strength dummy equals one when the partners domestic currency is relatively strong, and zero otherwise. The larger partners dummy is equal to one when an ISA involves two large partners, and zero otherwise. The country dummy is equal to one for the U.S. partnering firms, and zero otherwise. We estimate all regressions in the table using weighted least squares, with the weights equal to the reciprocal of the standard deviation of the market model residual. t-statistics are in parentheses. The number of observations is smaller because of data unavailability.

Model Variable Intercept Relative size Growth opportunities Growth opportunities Relative q dummy High-tech industry dummy Technical-alliance dummy Business relatedness dummy Prior experience Profitability Profitability Two-way alliance dummy Currency strength dummy Currency strength dummy Larger partners dummy Two-way alliance dummy Country dummy Year dummies N Adjusted R2 F-value
***Significant at the 0.01 level. **Significant at the 0.05 level.

(1) 0.5350 (0.81) -0.0116 (-2.40)** 0.3649 (5.96)***

0.5442 (1.33) 0.0897 (0.24) -0.4134 (-0.77) -0.1481 (-1.20) -0.1065 (-5.27)***

0.2178 (0.65)

No 336 0.1647 9.26***

(2) 1.2977 (1.09) -0.0111 (-2.21)** 0.3762 (6.05)*** -0.1323 (-0.60) 0.3945 (0.95) 0.0865 (0.21) -0.4215 (-0.77) -0.5186 (-1.13) -0.1555 (-5.20)*** 0.0899 (2.20)** 0.2850 (0.78) 0.0193 (0.04) -0.3325 (-0.90) -0.0546 (-0.15) Yes 336 0.1535 3.76***

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Table V. Changes in Operating Performance of Partnering Firms Surrounding Japanese-U.S. Strategic Alliances
This table presents the mean and median changes in operating performance of partnering firms surrounding announcements of Japanese-U.S. strategic alliances. Our operating performance measures are: 1) operating return on assets, which we define as operating income before depreciation as a percentage of total assets; 2) operating cash flows deflated by total assets, where we define operating cash flows as operating income less capital expenditures; 3) return on assets, which is net income divided by assets; and 4) asset turnover, which equals net sales over total assets. We examine the operating performance of the partnering firm in the alliance announcement year (year 0) and over the three-year period before and after the announcement year (years -3 to -1 and years +1 to +3). We also compare the partnering firms performance variables in year 0 with those in years -3 to -1 and with those in years +1 to +3, to measure the change in its operating performance surrounding the alliance. To control for both industry and size effects, we adjust the change in the performance variables by subtracting the matching firms change from the announcing firms change over the same period. The matching firm has the closest firm size, measured by the market value of equity 30 days before the announcement, among the firms with the same four-digit SIC code as the announcing firm. We use t-tests and Wilcoxon signed-rank tests to test the hypotheses that the means and medians are equal to zero. The number of observations varies because of data unavailability.

Year 0 level Industry-and-size-adjusted year 0 level Industry-and-size-adjusted change: Change from year -3 to 0 Change from year -2 to 0 Change from year -1 to 0 Change from year 0 to 1 Change from year 0 to 2 Change from year 0 to 3 Year 0 level Industry-and-size-adjusted year 0 level Industry-and-size-adjusted change: Change from year -3 to 0 Change from year -2 to 0 Change from year -1 to 0 Change from year 0 to 1 Change from year 0 to 2 Change from year 0 to 3

U.S. Partner Mean Median N Panel A. Operating Return on Assets 0.1327*** 0.1564*** 156 0.0221** 0.0183** 156
-0.0011 -0.0023 149 0.0093 0.0012 153 0.0121 0.0046 154 0.0277** 0.0102** 152 0.0397*** 0.0164** 146 0.0425** 0.0315*** 137 Panel B. Operating Cash Flows/Assets 0.0840*** 0.1137*** 156 0.0207** 0.0100** 156 0.0068 0.0173 0.0137 0.0276** 0.0305** 0.0309* 0.0090 0.0063 0.0041 0.0068** 0.0091** 0.0190* 143 151 154 151 146 137

Mean
0.0895*** 0.0036 -0.0038 -0.0014 -0.0024 0.0133*** 0.0138*** 0.0177*** 0.0269*** 0.0056 -0.0072 -0.0059 -0.0063 0.0081** 0.0149** 0.0129**

Japanese Partner Median

0.0873*** 0.0043 -0.0064* -0.0046 -0.0018 0.0098*** 0.0081*** 0.0070*** 0.0229*** 0.0002 -0.0067 -0.0138 -0.0050* 0.0055** 0.0093* 0.0066**

N
170 170 167 167 168 169 169 168 154 154 131 142 151 152 152 150

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Table V (Continued)
U.S. Partner Mean Median N Panel C. Net Income/Assets 0.0215* 0.0534*** 176 0.0211** 0.0140** 176
0.0102 0.0070 -0.0045 0.0107** 0.0134** 0.0253*** Panel D. Asset Turnover 1.0921*** 1.0432*** 0.0568* 0.0484* -0.0239 0.0168 0.0075 0.0276** 0.0490** 0.0489** -0.0295 0.0018 -0.0086 0.0045* 0.0216 0.0216** 0.0023 0.0175 0.0151 0.0359*** 0.0478*** 0.0581*** 171 176 176 173 166 156 177 177 174 176 176 174 167 156

Mean
0.0297*** 0.0015 0.0003 0.0022 0.0069 0.0066*** 0.0089** 0.0081** 1.0044*** 0.0104 -0.0039 -0.0032 -0.0083 0.0208** 0.0279** 0.0301**

Japanese Partner Median

0.0274*** 0.0022 -0.0006 0.0035 0.0003 0.0039*** 0.0038*** 0.0030** 0.9952*** 0.0237 0.0161 0.0155 -0.0114 0.0220*** 0.0148* 0.0224**

N
174 174 172 174 174 174 174 173 174 174 174 174 174 174 174 173

Year 0 level Industry-and-size-adjusted year 0 level Industry-and-size-adjusted change: Change from year -3 to 0 Change from year -2 to 0 Change from year -1 to 0 Change from year 0 to 1 Change from year 0 to 2 Change from year 0 to 3 Year 0 level Industry-and-size-adjusted year 0 level Industry-and-size-adjusted change: Change from year -3 to 0 Change from year -2 to 0 Change from year -1 to 0 Change from year 0 to 1 Change from year 0 to 2 Change from year 0 to 3
***Significant at the 0.01 level. **Significant at the 0.05 level. *Significant at the 0.10 level.

54