Arms Race or Détente? How Interfirm Alliance Announcements Change the Stock Market Valuation of Rivals

Most prior event studies find that the announcement of a new alliance is accompanied by a positive stock market response for the partners. This result has usually been interpreted as evidence for the prevailing view that alliances are effective vehicles for partners to acquire or access new skills and thus become stronger competitors. However, partners should also earn positive abnormal returns if alliances are used to shape competitive interactions, attenuating competitive intensity industry-wide. In this study we disentangle these different mechanisms by examining how alliance announcements affect the stock market‟s evaluation of allying firms‟ rivals: If an alliance is expected to make partner firms more competitive, this should lead to negative abnormal returns for partners‟ rivals; if an alliance is expected to facilitate a reduction in competitive intensity, this should lead to positive abnormal returns for rivals. Results from an event study analysis of R&D alliances in the telecommunications and electronics industries during 1996-2004 provide evidence consistent with competition attenuation in some alliances. Our research thus challenges the increasingly narrow focus on learning and resource accumulation through alliances, and calls for broader consideration of the roles and effects of collaboration, both for individual firms and for industry structure. Acknowledgements We would like to thank Benjamin Cole, Klara Gotz, P.K. Toh, Brad van Wijk, and Maggie Zhou for able assistance in collecting, cleaning and compiling the various data elements for this project. We are grateful to seminar participants at Duke University, New York University, University of Paris (Sorbonne), University of Toronto, and York University for insightful comments.