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The Optimal Duration of Equity Joint Ventures

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  • David Mayston
  • Juning Wang

Abstract

Whilst joint ventures offer a potentially attractive form of corporate and industrial organisation, they also experience high rate of break-up within ten years from their initial formation. In this paper, we model this process not as an uncertain random event, but rather as the predictable outcome of underlying economic variables, with break-up within a finite time resulting even under conditions of complete certainty. Given the prevalence of joint venture break-ups, it is in the interests of both partners in an equity joint venture to be fully aware of their own optimal durations of the joint venture in their initial negotiations for the formation of the equity joint venture. Where the underlying economic parameters imply differences in their individual optimal durations of the joint venture, there is therefore scope for mutually beneficial agreements on a binding date for the break-up of the joint venture, and for side payments to enable this binding agreement to be reached, either as cash payments or in terms of their relative shareholdings in the jointly-owned separate company that will manage the equity joint venture. In addition, there is scope for a differential corporate tax rate on the joint venture, compared to that on the go-it-alone businesses of the two partners, in order bring the two partners’ privately optimal durations into line with the socially optimal duration of the joint venture.

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File URL: http://www.york.ac.uk/media/economics/documents/discussionpapers/2011/1126.pdf
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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 11/26.

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Handle: RePEc:yor:yorken:11/26

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Keywords: Joint ventures; equity shareholdings; optimal duration; corporate tax rates.;

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  1. Kogut, Bruce, 1989. "The Stability of Joint Ventures: Reciprocity and Competitive Rivalry," Journal of Industrial Economics, Wiley Blackwell, vol. 38(2), pages 183-98, December.
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