Fundamental Analysis of Firm Performance Following Strategic Alliance Announcements

We examine whether accounting-based fundamental analysis can predict long term market performance in a strategic alliance context. We first evaluate whether Mohanram's (2005) G-Score explains differences in long-term buy and hold returns following announcements that firms have formed strategic alliances. We show that the G-Score does help explain future market performance following alliance announcements; however, Mohanram's signals focus on the financial characteristics of individual firms and may fail to account fully for the intangible benefits of interfirm relationships. From information disclosed in the alliance announcements and other context-specific information, we develop an alliance score (A-Score) that alone and in conjunction with the G-Score explains differences in future returns. We also document that the market does not correctly predict long term performance for the firms participating in the alliances. These results suggest that prior research that focuses on the short term reaction to alliance announcements, may overstate the benefits of alliances.