Shareholder Influence on Joint Venture Exploration

Abstract

In this study, we theorize about how different types of institutional investors influence firms’ choice of exploration versus exploitation for their joint ventures (JVs). Exploratory JVs engender risk, uncertain outcomes, and ex post contractual updating, whereas exploitative JVs allow for ex ante contracts. We argue that dedicated institutional investors (DIIs), who maintain concentrated holdings over time regardless of current earnings, offer tolerance for failure and reward for long-term success that encourages managerial choice of exploratory JVs. Transient institutional investors (TIIs), who trade frequently based on near-term performance metrics, prefer ex ante contracts and use exit to discipline managers who do not meet their short-term performance objectives. This suggests that TIIs may influence managers to reduce the extent to which they choose exploratory (as opposed to exploitative) JVs. Furthermore, we argue that the transactional governance of TIIs gives way to the relational monitoring of DIIs when both types of shareholders are present. As a result, the likelihood of choosing exploration, versus exploitation, as a JV formation strategy is greatest in the presence of high DII and TII ownership. We examine JVs among S&P 500 firms over the years 2000 to 2010, and results largely support our theory.