Legal systems, information asymmetry, and firm boundaries: Cross-border choices to diversify through mergers, joint ventures, or strategic alliances

Tomas Jandik and Raja Kali
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Tomas Jandik: Sam M. Walton College of Business, University of Arkansas, Fayetteville, USA
Raja Kali: Sam M. Walton College of Business, University of Arkansas, Fayetteville, USA

Journal of International Business Studies, 2009, vol. 40, issue 4, 578-599

Abstract: We examine how the organizational structure for diversification decisions involving firms from different countries is affected by the institutional context of the target country. Our theoretical analysis suggests that, as legal systems improve and information asymmetry is reduced, a transition from relational, “firm-like” arrangements to arm's length, “market-like” arrangements takes place. If institutions continue to improve, eventually a threshold is crossed after which arm's length deals edge out internal firm contracting. We provide an empirical test of the model using the sample of international strategic alliances, joint ventures and cross-border mergers involving US firms. Our empirical findings support the predictions of the theory. In addition, we document that US companies entering organizational structures predicted by our model are associated with greater abnormal returns around deal announcements. Journal of International Business Studies (2009) 40, 578–599. doi:10.1057/jibs.2008.95

Date: 2009
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