When Do Joint Ventures Create Value?

Analysis of a sample of 253 joint venture announcements suggests that joint ventures tend to be announced when the parent firms' performance is deteriorating. However, the parent firms earn positive abnormal returns around the announcement date. There is considerable cross-sectional variation in the stock market reaction to joint venture announcements. We identify three drivers of stock market reaction--strategic considerations, managerial misalignment, and signaling. The stock market reacts positively to joint ventures that involve pooling of complementary resources. Joint ventures that are carried out by firms with high levels of free cash flow are received negatively, indicating that the stock market penalizes joint ventures that are susceptible to managerial misalignment. Small firms that enter into joint ventures with larger firms earn significant positive abnormal returns, because the joint ventures acts signals of the small firm's value.