Ownership and Control in Joint Ventures: Theory and Evidence
Joint ventures, a particularly popular form of corporate cooperation, exhibit ownership patterns that are clustered around equal shareholdings for a wide variety of parent firms. In this paper, we investigate why 50-50 or "50 plus one share" equity allocations should be so prevalent. In our model, parent firms trade off control benefits and costs with incentives for resource contributions in the presence of asset complementarities. We show that strict resource complementarity eliminates moral hazard in parent contributions so that ownership provides sufficient incentives for optimal investments. However, the potential for extraction of residual control benefits by the majority owner creates a discontinuity in contribution incentives at 50% equity stakes that explains the optimal clustering of ownership around 50-50 shareholdings. Using data from 1,248 US joint ventures announced between 1985 and 2000, we empirically analyze the determinants of their ownership allocations and conduct tests of model predictions that offer strong support for our theory.
Joint ventures, a particularly popular form of corporate cooperation, exhibit ownership patterns that are concentrated at 50-50 or ‘50 plus one share’ equity allocations for a wide variety of parent firms. In this Paper, we argue that private control benefits create a discontinuity in contribution incentives around equal shareholdings that explains these two cluster points. Using data from US joint ventures, we empirically analyse the determinants of their ownership allocations and find that, consistent with our predictions, parents with similar contribution costs or a high potential for private benefits extraction prefer equal shareholdings and joint control. Similarly, parent-level spillovers make 50-50 ownership more attractive to the detriment of one-sided control while complementarities in parent contributions have the opposite effect. We also find evidence that contingent ownership arrangements such as explicit options and buyout or termination mechanisms serve to mitigate regime-specific contractual inefficiencies.
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