Alliance Contracts as Governance Mechanisms: Evidence From Earnings Management and Operating Performance

• In Event: Earnings & Leases

Abstract

We investigate whether strategic alliance arrangements impact earnings management behavior and operating performance. Using propensity score matching and a difference-in-differences approach, we find that both real and accrual-based earnings management decrease with the number of alliance contract provisions following alliance implementation. These results are consistent with the notion that alliance contract terms, or “operational governance provisions,” serve as an external monitoring mechanism. Results also suggest that the inverse relationship between alliance contract provisions and earnings management is driven primarily by accounting-related provisions, such as the right to audit the other party’s financial statements. Furthermore, we find that alliance firms’ subsequent operating performance improves in proportion to the number of operational governance provisions, providing further evidence that strategic alliances create firm value owing to monitoring arrangements between the contracting parties.

Authors

• Angela K Gore, George Washington University

• Yuan Ji, George Washington University

• Sok-Hyon Kang, George Washington University