The gain to stockholders from mergers is well documented. However, there is little evidence as to whether the source of the gain is due to synergy or management displacement. Merger is just one of an almost limitless variety of ways in which firms combine resources to accomplish some objective. A joint venture is another. In addition to being of interest as an independent phenomenon, because the original managements of the parent firms remain intact under a joint venture, investigation of wealth gains from joint ventures provides an opportunity to isolate the management displacement hypothesis from the synergy hypothesis as the source of gains in corporate combinations. Our results are 1) there are significant wealth gains from joint ventures, 2) the smaller partner earns a larger excess rate of return while the dollar gains are more equally divided, and 3) the gains, scaled by resources committed, yield "premiums" similar to those in mergers. We are inclined to interpret our results as supportive of the synergy hypothesis as the source of gain from corporate combinations. * Purdue University and University of Minnesota, respectively. 'See, for example, Asquith [1], Asquith, Bruner, and Mullins [2], Bradley [9], Bradley, Desai and Kim [10, 11], Dodd [13], Eckbo [16], Kim and McConnell [24], Langetieg [25], Malatesta [28], Mandelker [30], and Schipper and Thompson [37]. 2 Previous economic studies of various aspects of U.S. domestic joint ventures include Berg and Friedman [3-7], Boyle [8], Duncan [15], Fusfeld [19], and Pfeffer and Nowack [35]. For the most part, these studies employ accounting and aggregate economic data. To our knowledge, ours is the first study to use stock market data to address questions regarding joint ventures.
520The Journal of Finance acquired company receiving substantial "excess" returns and the stockholders of the acquiring company earning small or negligible "excess" returns.3Two general hypotheses have been proposed to explain the large increases in wealth associated with mergers.4 The first is that the pooling of the resources of the two merging companies gives rise to "synergies" which take the form of economies of scale, the combining of complementary resources, increased market power, improved production techniques, improved marketing and product distribution opportunities, the redeployment of assets to more profitable uses, and so on. The second is that the merger facilitates the replacement of the acquired company's inefficient, ineffective, or deliberately misintentioned management. Unfortunately, various studies of mergers have found it difficult (or impossible) to distinguish empirically between these hypotheses.In contrast to a merger, a joint venture involves the joining together of a subset of the resources of two (or more) companies to accomplish some objective under the combined management of two (or more) parent companies. In this regard, the primary distinction between a corporate merger and a corporate joint venture is that, although the management of the resources ...
