Wednesday, July 3, 2013

The Design of Equity Ownership Structure in Interfirm Relationships: Do Managers Choose according to Theory?

KALE Prasahant, PURANAM Phanish
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Journal of Organization Design 2, 2 (2013) 15-30

Theories explaining the equity ownership structure of inter-firm relationships, such as the Resource-based View or Transaction Costs Economics commonly assume a significant role for managerial choice, but this assumption is rarely assessed for its realism. In this study we use the policy capture methodology to directly assess whether managers choose according to theory (and which theory). We find that managerial choices of equity ownership are indeed influenced both by competitive advantage and transaction hazards, though to a greater extent by the former. Further only the former influences managers’ choices about the extent of equity ownership in their partner; transaction hazards motivate the choice of some equity over none. We discuss implications for how inter-firm relationships are and ought to be designed.