WORKING PAPER SERIES IN FINANCE 04-01 The Source of Abnormal Returns from Strategic Alliance Announcements

Strategic alliances attempt to create a cooperative association between two or more firms to share resources such as product design, production, marketing or distribution. Alliances can be used to avoid the rigidity of some organisational forms, such as mergers and takeovers, and to gain access to knowledge and skills otherwise not available. Despite the rapid growth in the formation of alliances, event studies of stock returns surrounding the announcement of strategic alliances are not common. This study seeks to add value to the existing literature by linking together theoretical models of strategic alliances with an empirical examination of stock returns on the announcement of strategic alliances. Using a sample of 123 strategic alliance announcements the results find strong support for the hypothesis that strategic alliance announcements generate significant positive abnormal returns on the announcement day. Although strategic alliances are more prevalent in the higher technology industries the source of the abnormal stock returns is a sub-sample of firms with lower market to book values. This is found to be supportive of the hypothesis that the announcement of a strategic alliance is additional information for firms with lower growth. There is no empirical support for the knowledge, flexibility and the hubris hypotheses.