By Stephen Raymond
Acquisitions in the pharmaceutical and biotechnology field have been fueled by a variety of factors ranging from riding strong equity markets to lucid managerial hubris. In all cases, asymmetric information, specifically the moral hazard problem between acquiring and target firms, played large roles in the final value of any acquisition; target firms inherently had better valuations of their worth than acquiring firms. To mitigate this, firms actively engage in learning activities that include forming strategic alliances. Efficient markets will recognize advantageous relationships. This study investigates whether learning effects from strategic alliances helped to remedy this moral hazard problem by investigating how various alliance metrics affected acquiring firms’ short-term cumulative abnormal returns and daily stock return volatility for acquisitions in 1998-2004. Evidence was discovered that acquiring firms that were more central figures in an alliance network and engaged in a prior alliance with their target company tended to realize greater short-term cumulative abnormal stock returns. In addition, more central firms tended to realize less daily stock return volatility on the date of the acquisition. In contrast, firms with more third-party shared alliances tended to realize less short-term cumulative abnormal stock returns and greater daily stock return volatility.
Advisor: Henry Grabowski
