Strategic alliances are well-established organizational forms and a means of strategy implementation. Despite their growing pervasiveness in the economy, existent literature provides few insights about earnings quality of strategic alliances. This challenge is especially severe in contractual alliances (CAs), where firms do not form a new corporate entity that is separate from the parent organization in comparison to joint ventures (JVs). We investigate how earnings attributes differ depending on involvement in strategic alliances of 8137 CAs and 3026 JVs spanning 1997–2007. We find, in particular, that earnings attributes of firms involved in contractual alliances are broadly reflective of low underlying accounting quality. Relative to JV firms and non-alliance (NA) firms, they have higher levels of discretionary accruals, lower accrual quality, and earnings that are less persistent, less smooth, less relevant, less timely, and less conservative. They also have lower earnings response coefficients.
Strategic alliances are voluntarily initiated cooperative agreements between firms that involve exchanging, sharing or co-developing resources or firm-specific assets (Li, Qian, & Qian, 2012). Firms enter strategic alliances to minimize costs that stem from coordination difficulties, to access other parties' resources, to acquire institutional knowledge, and to retain and develop own resources by combining them with those of partners' (Chan, Kensinger, Keown, & Martin, 1997).
In this study, we tackle the broad question of how firms' earnings quality differs depending on their involvement in strategic alliances. Despite growing pervasiveness of strategic alliances the existent literature provides few insights about the impact of strategic alliances on firms' earnings. This impact is particularly important for firms' strategy since firms' earnings is a significant indicator of firm performance. In particular, alliances often involve an ongoing intermingling of the operations, such as of reporting behaviors, of two or more “independent” entities. Hence, the economic performance of one involved entity now depends partly on the well-being of its partner(s). Moreover, while the overall alliance constitutes an arms-length agreement, the structuring of individual transactions and allocations within it may involve various informal quid-pro-quo arrangements among the partners. These tradeoffs have substantive implications for periodic financial accounting reports. In such cases, strategic alliance arrangements may blanket various opportunistic and short-run earnings management activities.
Using earnings quality metrics established in the literature (Velury & Jenkins, 2006) we explore the earnings quality of (1) firms involved in joint venture alliances (JV), and (2) firms involved in contractual alliances (CA). Specifically, we evaluate whether earnings attributes differ between firms with joint ventures (JV-firms) and firms with contractual alliances (CA-firms), as well as between such alliance firms and firms without any recent alliance activity (i.e., non-alliance or NA-firms). Our findings broadly support that firms involved in CA earnings exhibit inferior attributes relative to either JVs or NAs. However, JVs and NAs are indistinguishable for most of the earnings quality attributes examined. Although managers of CA-firms provide more quantitative and qualitative voluntary earnings reports, i.e. voluntary disclosure, than that of all other firms including JV-firms and NA-firms to decrease the premium that investors demand because of poorer information quality environment, when the alliance is not formalized and largely unreported, there is still an evidence of a substantive relative impairment in earnings quality.
