1 Board Incentive, Director Experience, and Outcomes of Joint Venture Investment Jung-Ho Lai Department of Finance, National Taipei College of Business, Taiwan I-Ju Chen Division of Finance, College of Management, Yuan-Ze University, Taiwan The NTU International Conference on Finance, 2010

2  Investigate the advising role of board members to the success of a JV strategy. Purpose

3 Motivations  Firms have incentives to maximize firm resources (Eisenhardt and Schoonhoven, 1996; Das and Teng, 2000)  Firm resources are usually firm-specific, Ex: not perfectly tradable (Chi, 1994; Oliver, 1997) Ex: with various degree of mobility, imitability, and substitutability (Miller and Shamsie, 1996; Das and Teng, 1998)  JVs is a useful tool for organization learning and optimal resources utilization (Kogut, 1988) Importance of JVs (Joint Ventures)

4 Motivations  ex-anti a JV partner search  ex-post JV management  Opportunism incentives Difficulties of forming a JV

5 Difficulties of ex-anti a JV partner search  difficulties to gain the information about other firm’s resources (Pearce, 1997; Gulati and Gargiulo, 1999; Gulati and Westphal, 1999; Park and Ungson, 2001) Ex: Skills or know-how are usually tacit and deeply embedded (Das and Teng, 1998)  Embeddedness is a kind of interpersonal relationships that people have developed for business interaction in networks. (Nahapiet and Ghoshal,1998) Ex: Lack mutually trust among firms (Kogut, 1989; Hamel, Doz, and Prahalad, 1989; Gulati, Khanna, and Nohria, 1994; Khanna, Gulati, and Nohria, 1998; Gulati and Westphal, 1999).

6 Difficulties of ex- post a JV management  Coordination/integration difficulty between JV partners:  Different management, operation structures, performance evaluation system (Park and Ungson, 2001; Luo, 2008)

7  Opportunism incentive of JVs partners may tend to seek temporal, critical strategic interdependence (Kogut, 1989; Gulati and Westphal, 1999)  Opportunism incentive of JV partners also leads to ex-post instability of JVs (Kogut, 1989; Gulati and Westphal, 1999) => Firms need to reply on trustworthy and knowledgeable experts to provide the management team with valuable information for JV decisions. (Pearce, 1997; Gulati and Gargiulo, 1999; Gulati and Westphal, 1999; Park and Ungson, 2001). Opportunism incentives of JV partnering firms

8 We argue … We argue that the past JV experience and relevant industry expertise of board members is crucial to the effectivenss of joint venture decisions.

9 Contributions  Not only board’s monitoring, board’s advising and consulting benefit to the success of corporate decisions.  board’s prior JV experience and relevant industry expertise contribute to JV success.  complements the JV literature by addressing director’s past relevant experience is a significant value contributing to value gains in firms’ JV strategies.

10 Features of a successful JV  Successful characteristics of a JV decision: (Bierly and Gallagher, 2007)  matching with strategic fit,  mutually trust  a timely response to the environmental uncertainty

11  interorganizational networks (Gulati and Gargiulo, 1999): alleviate the risk of opportunism associated with the corporate cooperation  external tacit knowledge (O’Hagan and Green, 2002)  trustworthy information (Gulati and Gargiulo, 1999; Gulati and Westphal, 1999; Kim and Cannella, 2008) => suitable partner selection in JVs (Gulati and Westphal, 1999 ) Directors serve advising roles to the management

12 The value of experience  Accumulation of experience  can elicit a more complete understanding of the cause-and-effect relation of a strategy (Gulati, Khanna, and Nohria, 1994; Khanna, Gulati, and Nohria, 1998).  refines expert’s capabilities of distinguishing important from unimportant information in the whole information set (Ericsson and Charness, 1994; Ericsson and Lehamn, 1996).  feels comfortable and confident to advise managers and make contributions to firm competitive advantages (McDonald, Westphal, and Graebner, 2008).

13 Experience in relevant industry  Information about specific industry is confidential, organizational embedded, and varies by industries (Certo, 2003; Gulati and Garguilo, 1999; Kor and Sundaramurthy, 2009)  Value of directors’ industry experiences:  Understand the competitive conditions or technology development (Arthur, 1994; Boeker, 1997)  Able to accurately assess candidate partner’s resources, competencies, and potential synergy for each partnership

14 To sum up,  Directors’ prior JVs experience and their industry experience has the characteristics:  Tacit expertise,  Vividness and recency,  Built on a trustful relation  Able to identify emerging opportunities in specific industry =>their experience is expected to be crucial to a successful JV decision.

15 Hypotheses quick response to external resource fit mutual trust Board experience on JVs and relevant industry Success of JVs

16 Hypotheses statement  H1: JV firms with more directors who have previously been involved in JV decisions will perform better than JV firms with fewer outside directors having such experiences.  H2: JV firms with more directors who have experiences in partner firm’s industry will perform better than firms with fewer directors having such industry experiences.

17 Hypotheses Statement  Hypothesis 3a: Board member ownership will be associated with more significantly positive outcomes of JV announcements where board has more directors with JV experiences.  Hypothesis 3b: Board member ownership will be associated with more significantly positive outcomes of JV announcements where board has more directors with experiences relevant to the partner firm’s industry.

18 Sample and Methodology  JVs Sample: an initial sample of joint ventures made by U.S. corporations was taken from the Security Data Corporation’s (SDC) Mergers and Corporate Transactions database  Sample period:  JV announcement date: Lexis/Nexis database and the Dow Jones News Retrieval Service database  Board characteristics and ownership data source: Disclosure, Inc.’s Compact Disclosure database, Standard and Poor’s Registor of Corporations, Directors, and Executives, and corporate proxy statements.

19 Sample and Methodology  Data on financial and operating characteristics came from Compustat.  Stock returns data were from CRSP.  Our search identified 462 announcements of joint ventures made by US firms.  Methodology – event study approach  Dependent variable: CAR (-1, 0)

20 Independent variables I  Independent variables I: directors’ prior experiences with JVs Where indicates a JV decision of a focal firm at the N firms where the individual served as manager or director in year Y (t indicated the time of the survey), and D indicates the number of directors on the board making a JV decision. Steps: 1. For each JV firm, count past JV experience for each director 2. Those JV experience is counted only if director served as manager or director in other firms which also have JV experience. 3. Survey period cover past 8 years prior to the JV event. 4. Then, cumulate the experience held by each director.

21 Independent variables II  Independent variables II: director’s prior experiences with specific industry Where indicates an JV of a company that has the same two-digit SIC code as JV firm F at the N firms where the focal individual served as manager or director in year Y, and D indicates the number of directors on the board making the focal JV decision.

22 Sample Distribution by Year and International/Domestic tie-up Panel A. Sample Distribution by Year and International/Domestic tie-up Year / Sample CasesInternationalDomestic Total245217

23 Descriptive Statistics and Pearson Correlation Coefficients VariablesMeanS.D Cumulative Abnormal Returns (%) Director experiences with JVs Director experiences with partner’s industry Director ownership Board size Board independence Firm’s prior JV experience Firm’s past profitability Debt Ratio Asset specificity

24 Cross-sectional Regression of JVs Announcement Effect on Director Experience Variable/Model12345 Experience Variable Director Experience with Joint Ventures 0.061***0.054**0.046** (2.97)(2.14)(2.06) Director Experience with Partner’s Industry 0.063***0.057**0.037** (2.89)(2.16)(1.95) Moderated Variable Director Ownership* Director Experience with Joint Ventures 0.080**0.090* (2.01)(1.79) Director Ownership* Director Experience with Partner’s Industry 0.035*0.027* (1.98)(1.66) Controls Firm’s past Profitability **-0.034**-0.034*-0.056*-0.037* (-2.13)(-2.09)(-1.91) (-1.89) Debt Ratio 0.012*0.016*0.021* * Board size * *-0.021* (-0.98)(-1.72)(-1.55)(-1.83)(-1.66) Board independence Firm’s prior JV Experience (-0.23) Asset specificity *-0.057*-0.047* * Industry DummyIncluded Yearly DummyIncluded Adj-R F-statistic5.45***4.53***4.21***3.46***3.32*** No of Observations462

25 Conclusions  affirm our conjectures that director past experiences are helpful for firms’ joint venture decisions.  indicate that director’s knowledge accumulated from prior joint venture undertakings as well as relevant industry experiences can determine the effectiveness of their advise to the management, particularly when directors have higher level of stockholdings.

26 Thank You. & Comments Welcome.