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Rev Fin 2002; 15:1251-1282
© 2002 the Society for Financial Studies

Structuring International Cooperative Ventures

Thomas H. Noe
Tulane University

Michael J. Rebello
Georgia State University

Milind M. Shrikhande
Georgia State University and Federal Reserve Bank of Atlanta

Address correspondence to Milind M. Shrikhande, Department of Finance, #1221, J. Mack Robinson College of Business, Georgia State University, University Plaza, Atlanta, GA 30303-3083, or e-mail: mshrikhande{at}gsu.edu.

Abstract

We examine the effect of bargaining power and informational asymmetry on the design of international cooperative ventures in the presence of restrictions on equity participation and investment. When the bargaining advantage rests with the multinational, equity participation restrictions can increase the profits to domestic firms and encourage suboptimal investment policies. Overinvestment occurs when the multinational's bargaining advantage is reinforced by an informational advantage, while underinvestment occurs when the domestic firm possesses the informational advantage. In contrast, when the bargaining advantage rests with the domestic firm, equity participation restrictions do not affect investment levels.


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