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Joint Ventures and the Option to Expand and Acquire

Author

Listed:
  • Bruce Kogut

    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

Abstract

This article develops the perspective that joint ventures are created as real options to expand in response to future technological and market developments. The exercise of the option is accompanied by an acquisition of the venture. It is hypothesized that the timing of the acquisition should be triggered by a product market signal indicating an increase in the venture's valuation. Based on a sample of 92 manufacturing joint ventures, this hypothesis is tested by estimating the effect of product market signals on the hazard of acquisition. The results indicate that unexpected growth in the product market increases the likelihood of acquisition; unexpected shortfalls in product shipments have no effect on the likelihood of dissolution. This asymmetry in the results strongly supports the interpretation of joint ventures as options to expand.

Suggested Citation

  • Bruce Kogut, 1991. "Joint Ventures and the Option to Expand and Acquire," Management Science, INFORMS, vol. 37(1), pages 19-33, January.
  • Handle: RePEc:inm:ormnsc:v:37:y:1991:i:1:p:19-33
    as

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    File URL: http://dx.doi.org/10.1287/mnsc.37.1.19
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    References listed on IDEAS

    as
    1. Leech, Dennis, 1985. "Ownership Concentration and the Theory of the Firm : A Simple-Game-Theoretic Approach to Applied US Corporations in the 1930's," The Warwick Economics Research Paper Series (TWERPS) 262, University of Warwick, Department of Economics.
    2. Guillermo Owen, 1972. "Multilinear Extensions of Games," Management Science, INFORMS, vol. 18(5-Part-2), pages 64-79, January.
    Full references (including those not matched with items on IDEAS)

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