The Financial Review 38 (2003) 213--234

Evidence on Value Creation in the Financial

Services Industries through the Use of Joint
Ventures and Strategic Alliances
Kimberly C. Gleason
Bentley College

Ike Mathur
Southern Illinois University

Roy A. Wiggins, III

Bentley College

Abstract
While an extensive body of literature has examined merger, acquisition, and consolidation
activity in commercial banks and other financial services firms, little attention has been paid to
examining how these institutions use the cooperative activities of joint ventures and strategic
alliances to accomplish their growth objectives. We analyze the effects of the use of joint
ventures and strategic alliances by a sample of firms in the banking, investment services, and
insurance industries. Our results show that commercial banks, investment services firms, and
insurance companies experience significant abnormal returns of 0.66% on average when they
announce their participation in a joint venture or strategic alliance. These abnormal returns are
significantly positive across the four strategic motives of domestic, international, horizontal,
and diversifying cooperative activities. Using a matched sample, we also show that our sample
firms enjoy significant, positive, abnormal returns for holding periods of six, 12, and 18 months
after the announcement of the cooperative activity.

Corresponding author: Department of Finance, Southern Illinois University, Carbondale, IL 62901-4626.

Phone: 618-453-1421; Fax: 618-453-5626; E-mail: imathur@cba.siu.edu
The authors thank two anonymous referees, Stephen P. Ferris (the editor), and participants at the 2000
Financial Management Association meeting for helpful comments on earlier drafts of the paper.

213

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Keywords: joint ventures, strategic alliances, long-horizon performance

JEL Classifications: G21/G29/G14

1. Introduction
Financial services firms, like any corporation, expand through cooperative strategies like joint ventures and strategic alliances, as well as more traditional, integrative
ones (McConnell and Nantell, 1985).1 What we currently know about these expansion strategies is rather one-sided. On the one hand, evidence on the wealth effects of
financial mergers and acquisitions mimics that found in nonfinancial activity. Specifically, the combined gains to bidder and target firms appear to be positive in several
studies (Baradwaj, Fraser, and Furtado, 1990; Cornett and Tehranian, 1992; Zhang,
1995; Gupta, LeCompte, and Misra, 1997), while other researchers find evidence of
a negative price reaction to bidders (Baradwaj, Fraser, and Furtado, 1990; Madura
and Wiant, 1994; Gupta, LeCompte, and Misra, 1997) or insignificant changes to
acquiring firm value (Sushka and Bendeck, 1988; Baradwaj, Dubofsky, and Fraser,
1991). In fact, Palia (1994) shows that two-thirds of the studies on bank mergers
report negative abnormal returns for acquiring banks.
Another line of research argues, on the other hand, that cooperative activities
are effective alternatives to more competitive strategies such as acquisitions. Chan,
Kensinger, Keown, and Martin (1997) find evidence that strategic alliances are an
effective alternative to more integrated forms of corporate combinations, while Kogut
(1988) and McConnell and Nantell (1985) make similar arguments for the alternative
use of joint ventures. While these studies provide important insights into the broad
use of these strategies, in each case, they do so by examining heterogeneous samples
comprised of many different industries. The purpose of this paper is to examine the
role of these cooperative activities in the growth strategies of firms in financial services industries.2 The financial services industries provide interesting opportunities
to better understand these inter-corporate transactions for several reasons.
First, joint ventures and strategic alliances are an increasingly important mechanism for growth in the financial services industries, as evidenced by the substantially
increasing number of transactions since 1990. In addition to this increased frequency
of joint venture and strategic alliance activities, several well-known firms make largescale use of these devices. For example, American International Group, Citicorp, Bank

1 Joint

ventures generally result in the creation of a separate legal entity similar to corporations, partnerships, or limited partnerships. The other type of organizational form is a category of less formal arrangements, strategic alliances. Alliances represent considerably less structured contractual agreements,
involving marketing, licensing, and research and development agreements. We refer to joint ventures and
strategic alliances collectively as cooperative strategies or cooperative activities.

2 Our analysis of financial services industries includes commercial banks, investment services firms (such

as brokerage houses), and insurance companies.

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215

of America, and Chase Manhattan have participated in 55, 39, 32, and 29 events, respectively, since 1984. This high level of activity by major financial services firms
suggests that these cooperative arrangements are playing a more prominent role in
the growth strategies of these firms.
Second, a substantial amount of attention has recently focused on consolidation
activities in the financial services industries (Berger, Demsetz, and Strahan, 1999), as
well as in banking (Rhoades, 1998; Milbourn, Boot, and Thakor, 1999; Hughes, Lang,
Mester, and Moon, 1999), life insurance (Cummins, Tennyson, and Weiss, 1999), and
credit unions (Fried, Lovell, and Yaisawarng, 1999). In fact, the lead article of a special
issue of the Journal of Banking and Finance reviews the existing literature and cites
over 250 articles related to consolidation activities in the financial services industries
(Berger, Demsetz, and Strahan, 1999).Despite this interest in consolidation activities,
very little academic research has examined how financial service firms use joint
ventures and strategic alliances to obtain strategic assets, enter new product markets,
and expand geographically. One notable exception is a study by Jacobsen and Tshoegl
(1999) in which they examine the strategic alliance strategies of Norwegian banks.3
Third, ongoing changes in the regulatory environment, culminating in the de facto
repeal of the Glass-Steagall Act in 1999, suggest that financial services firms will
continue to strategically position themselves in this evolving competitive marketplace.
One important possibility arising from these regulatory changes is cross-industry
activity between larger banking organizations and other financial service providers,
such as brokerage firms or investment banks (Berger, Demsetz, and Strahan, 1999;
Milbourn, Boot, and Thakor, 1999). In late November 1999, for example, the Spanish
bank Banco Bilbao Vizcaya was seeking a strategic alliance with Italys Unicredito
Italiano. This strategic alliance is perceived as an important first step towards eventual
merger of the two banks. An official for Unicredito stated, The final goal is to merge
the Spanish and Italian banks into a European bank in two or three years (Edmonson
and Robinson, 1999).
We analyze 638 joint ventures and strategic alliances involving financial services
firms from 1985 through 1998. We look at the motives for entering into strategic
alliances and joint ventures, and the wealth effects arising from these cooperative
activities. We find that joint ventures and strategic alliances are value-generating
transactions when they are used to enter both new product and geographic markets. For
example, all three types of financial service firms generate gains for their shareholders
when they participate in international ventures or alliances. Further, we also find that

3 This

disproportionate treatment of integrative and cooperative strategies extends beyond traditional research activities as well. The 2001 Report on Consolidation in the Financial Sector issued by the Bank
for International Settlements discusses joint ventures and strategic alliances anecdotally. In a nine-page
definitional overview discussion, joint ventures and strategic alliances are discussed in half a page. The
rest focuses on mergers and acquisitions (M&A). In the Appendix, joint venture activity is summarized in
a single page (Table A.18), while the previous 17 tables take up 63 pages to provide the same statistical
coverage on M & A activity around the world.

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these cooperative strategies enable commercial banks and insurance companies to

enter unrelated lines of business that may be (or may have been) forbidden through
traditional acquisition means due to regulation.
The remainder of the paper is organized as follows. We discuss the nature of these
cooperative strategies and the motivations for using them in Section 2. We describe
the data and research method in Section 3, while the empirical results are presented
in Section 4. Section 5 concludes the paper.

2. The nature of joint ventures and strategic alliances

2.1. Theoretical motivations
Harrigan (1985) describes integrative and cooperative growth strategies as a
range of alternatives that vary in the degree of equity ownership and contractual control. Mergers and acquisitions make up the end of this spectrum that is characterized
by full equity ownership. The acquiring firms in these transactions take ownership
of the asset and skill base in exchange for assuming all of the risk inherent in those
assets. Growth alternatives where no new entity is created and there is no ownership
position make up the other end of Harrigans classification structure. These strategies
are pure contractual agreements or strategic alliances. The middle range contains
alternative transactions that are characterized by both partial ownership and some degree of contractual control (e.g., joint ventures). These latter two categories provide
the firm with viable growth strategies while leaving the asset base and management
structure of the parent firms virtually intact. This paper focuses on them.
A substantial body of literature has evolved over time that seeks to explain the
theoretical motivations for broadly-defined cooperative strategies in general (see,
e.g., Contractor, 1990), and for joint ventures in particular (see, e.g., Harrigan, 1985;
Kogut, 1988). While they use different terminology for their general classifications,
there is considerable overlap in these three discussions. One common motivation is
based on the theory of transaction costs (Williamson, 1975, 1985), which suggests
that firms transact through the mode that minimizes production and transaction costs.
This view considers these strategies as an efficient solution to what Kogut (1988)
calls the hazards of economic transactions.
A second motivation relates to internal uses for these strategies, which are concerned with the sources of the firms internal or firm-specific advantages. Cooperative
efforts lead to the creation of competitive strengths through resource aggregation and
risk-sharing efforts. In some frameworks, this is known as organizational knowledge
and learning (Lorange and Roos, 1992). Firms partnering in these cooperative arrangements use them as a means for learning and extending their capabilities, as a
means for retaining some knowledge base, and as a mechanism for informational
exchange.
The third motivation focuses on the strategic issues facing the firm. Under the
strategic motivation, firms choose the cooperative growth mode that holds the best

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217

potential for maximizing profits by improving their competitive position. In other

words, their choice of potential joint venture partners is made within the context
of their competitive environment (e.g., rivals and consumers). Harrigans framework
classifies this choice behavior into two distinct categories: competitive uses that serve
to strengthen the firms existing strategic position, and strategic uses that hold the
potential for enhancing or adding to the firms current strategic position. Competitive
motivations include preempting competitors by looking for first-mover advantages,
and influencing the evolution of the firms industry by overcoming trade barriers/
restrictions, accessing global opportunities, or creating more efficient competitors.
The strategic uses focus on identifying and exploiting synergies, technology/skill
transfer, and opportunities to expand the scope of the firm through diversification.
While the motivations outlined in these studies are presented in a general sense,
they have specific relevance for the cooperative activities undertaken by the financial
services firms we examine. We consider these issues in this study by looking at two
important dimensions of these transactions. First, we look at the relationship between
those transactions that are domestic (partners are from the same country) versus those
that are cross-border or international (partners are not from the same country). Second,
we look at the relationship between those transactions that involve the same product or
industry versus those that are cross-product or diversifying in scope. In fact, Bodnar,
Tang, and Weintrop (2001) suggest that failure to consider both product market and
geographic characteristics may bias any attempt to calculate the value arising from
diversification.

2.2. Domestic and international cooperative activities

Social and political changes in areas such as Eastern Europe, the Middle East, and
Latin America, combined with technological changes such as the dynamic evolution in
telecommunications, have set the stage for the globalization of business. Corporations,
in general, are seeking to become less provincial and more global in their activities, at
the minimum to remain competitive, and, ideally, to enhance competitiveness. This
corporate vision is especially important since many firms cannot meet their growth
objectives solely through internal means. Thus, international transactions provide
alternative strategies for accomplishing these growth objectives.
Most firms lack the capability to launch large-scale multinational campaigns
through more traditional integrated organizational forms. They may lack the experience, the human and/or financial capital, and the infrastructure to implement growth
through full equity ownership alternatives. Cooperative joint ventures and strategic
alliances offer opportunities for cross-border expansion in spite of these deficiencies.
The popularity of these strategies is rising, partly because the advantages of control
and ownership do not outweigh the risks, or the financial and managerial commitments facing the firm (Newman and diCiccio, 1998). These strategies facilitate entry
into countries that were once inaccessible (e.g., China, the republics of the former
Soviet Union, and Eastern Europe) or were governed by regulations mandating a local

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partner (e.g., Chile). Firms can also benefit because these relationships can provide
access to existing distribution systems (in lieu of building or buying), new customer
bases, new technology, information or skills, and existing or low-cost manufacturing
capabilities. Expanding firms can establish associations and relationships with existing firms, products, or franchises. Kvint (1998) argues that both the domestic and
international partners can use these strategies to decrease the risks they face.4
It is apparent that these strategies offer firms benefits and a means for reducing
some of the risks inherent in using acquisition for international expansion. We incorporate these important considerations into our analysis by looking at both domestic
and international joint ventures and strategic alliances. We classify a transaction as a
domestic transaction if all participating partners are from the United States. We classify the transaction as international if at least one of the partners is from a non-U.S.
country.
Appendix A provides a listing of examples of joint ventures and strategic alliances analyzed in this study. In Appendix A.1, joint ventures one and two are
domestic transactions because all partners are from the United States. Joint ventures
three and four are illustrative of international joint ventures because at least one of
the partners is non-U.S. In the second section of Appendix A, we see that one and
two are domestic alliances and three and four are international alliances.

2.3. Integrating and diversifying activities

The cooperative activities of joint ventures and strategic alliances are used as
a strategic means of diversifying or expanding the scale and/or scope of the firms
operations. The resulting pattern of diversification depends on the scope of operations
of the financial services parent firms and the cooperative activity. If both the parent
and the cooperative activity are in the same industry, then the resulting venture or
alliance is an example of a horizontal cooperative activity. The new entity, in this case,
operates in the same product or service market although it may do so in a different
geographic locale. The cooperative activity may arise from the need to expand or add
to the firms product line, or take better advantage of excess capacity. It could also
be used to preempt competitors from entering a particular market venue.5
Diversifying or cross-product strategies, on the other hand, arise when the financial services parent and the cooperative activity are not in the same industry. Firms
pursue these strategies in search of new skills, technology, or resources. These types

4 Kvint

(1998) cites the following as examples. Product risk arises because of specific risk issues related
to the inputs of production (i.e., materials and labor), credit, operating and regulatory environments, and
liability concerns. Financial risk includes currency and exchange rate risk, as well as concerns stemming
from interest rates, liquidity, settlement, derivatives and hedging, and the possibility of fraud.

5 Chan,

Kensinger, Keown, and Martin (1997) show that horizontal strategic alliances generate higher
abnormal returns than their diversifying counterparts.

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219

of strategies may also be beneficial when entering new geographic or product markets
where barriers to entry make partnering an attractive alternative.
We classify the transactions in our sample in terms of horizontal or related
product (i.e., the same industry) versus diversifying or cross-product (i.e., different
industry) agreements. In the first section in Appendix A, we see that joint ventures
one and three are horizontal agreements since the financial services parent and the
joint venture are in the same industry. Joint ventures two and four are diversifying
activities as the parents and the venture are not in the same industry. For the strategic
alliances listed in Appendix A.2, we note that one and four are horizontal in nature,
while two and three are examples of diversifying alliances.

3. Research design
3.1. Sample selection
Data are obtained from the Securities Data Corporation (SDC) International Joint
Ventures database by screening on several criteria. In the data screening process, U.S.
commercial banks, investment services, and insurance companies involved in joint
venture or strategic alliance activity from 1985 to 1998 are selected. This screen
involves selecting SIC codes 6021 and 6022 for banks, 6200s for investment services,
and 6300s and 6400s for insurance companies. At least one of the financial services
parents must have financial data available for an announcement to be included in
the analysis. Financial data is often available for more than one financial services
partner for an announcement. Some firms, such as Chase Manhattan, engaged in
multiple cooperative activities during the sample period. Thus, 187 firms participated
728 times in 628 cooperative activities. Share price data for 513 announcements is
available from CRSP.
Our data fall into three distinct categories. First, we use accounting-based data
from Standard and Poors Research Insights for the sample period from 1985 to
1998. Our data from Research Insights encompasses the 728 participants in the 638
cooperative activities. The descriptive statistics in Tables 1 through 4 are based on
these 728 participants.
Second, we use CRSP stock market returns data to identify short-term stock
market performance associated with the announcement of the cooperative strategies for our sample firms. We had the 1997 CRSP files available at the time of the
analysis for this paper. Further, during the 1985 to 1997 period, stock returns were
not available for some sample firms. The analysis in this category includes 513 firms
and is reported in Tables 5 and 6.
Finally, for our long-term performance analysis, we use both CRSP and Research
Insights data. We omit firms with multiple announcements within the respective
six-, 12-, or 18-month holding period. If the relevant holding period contains more
than one announcement per partnering firm, the holding period returns may not
capture the impact of the announcement event under consideration. Further, due to

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size considerations, we are unable to match certain firms in the sample (i.e., there was
no firm in the same SIC and size classification that had not engaged in a cooperative
activity or merger during the same time horizon as the sample firm). Thus, the results
reported in Table 7 include 187 announcements.

3.2. Research methods

3.2.1. Event study

To test the markets reaction to the announcements of these joint ventures and
strategic alliances, we use event study methodology with the significance tests based
on the standardized cross-sectional method (Boehmer, Musumeci, and Poulsen, 1991).
Returns are modeled using ordinary least squares. A 100-day estimation period was
chosen from t110 to t11 where t = 0 is the event date.6 Cumulative abnormal
returns (CARs) are reported for the (1,+1) and (1,0) event windows.

3.2.2. Long-horizon holding period returns

We further examine wealth effect issues related to these cooperative transactions using long-horizon holding period returns. Previous studies have shown that
estimating long-horizon returns by accumulating short-term abnormal returns leads
to biased test statistics (see, e.g., Conrad and Kaul, 1993; Barber and Lyon, 1997).
Barber and Lyon provide evidence that using benchmarks comprised of control firms
yield well-specified test statistics because this benchmarking approach mitigates the
biases discussed (e.g., new listing, rebalancing, and skewness biases).
We use a matching firm sample procedure for estimating the long-horizon average holding period abnormal returns (AHAR) for our sample firms. We first identify
matching firms for our sample of firms on the basis of four-digit SIC codes. From
this set we next match firms on the basis of size as measured by total assets. We then
calculate raw returns for both sample and matching firms from the month subsequent
to the announcement date for six-, 12-, and 18-month holding periods. The reported
AHARs are the average difference between the holding period returns for the sample
and matching firms. The numbers of positive and negative long-horizon holding period abnormal returns are also reported along with the test statistic for the two-tailed
generalized sign test.

6 We

varied the parameter estimation period from 100 to 150 days. Results similar to the ones reported
were obtained. In some cases our total sample includes more than one announcing firm for the same date.
Accordingly, our significance tests adjust for cross-sectional dependence in the regression residuals. We
also adjust for serial dependence as well as for changes in event induced variance (see the manual for
Eventus, version 7.0). Although not reported here, the use of Scholes-Williams betas produced similar
results to the ones reported here. CARS are based on an equally weighted market portfolio. Similar results
were obtained with the value weighted market portfolio.

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221

Table 1
Distribution of joint ventures and strategic alliance announcements
This table provides the distribution of announcements by year of announcement over the sample period from
1985 to 1998, by the mode of cooperative activity, i.e., whether it was a joint venture or a strategic alliance,
and by industry classification. Some of the announcements involve more than one banking, investment
services, or insurance firm. Thus, the total number of firms in the sample is larger than the total number
of announcements.
Panel A: By year
Year of
announcement

Number of
announcements

% of total

78
93
67
123
74
62
35
42
35
6
8
3
11
1
638

12.23
14.58
10.50
19.28
11.60
9.72
5.49
6.58
5.49
0.94
1.25
0.47
1.72
0.16
100.00

1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
Total announcements
Panel B: By mode classification
General classification
of cooperative activity

Number of
announcements

Number
of firms

385
253
638

420
308
728

Joint venture
Strategic alliance
Total
Panel C: By industry classification
Industry
Banks
Investment services
Insurance
Total announcing firms

SIC codes
6000s
6200s, 6400s
6300s

Number of
announcements

Number
of firms

343
92
203
638

407
96
225
728

4. Empirical results
4.1. Summary of sample characteristics
Table 1 provides information regarding the distribution of announcements. Panel
A of Table 1 shows the frequency of announcements from 1985 to 1998. The

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K. C. Gleason et al./The Financial Review 38 (2003) 213234

Table 2
Summary of financial characteristics of the partner firms
This table provides summary financial characteristics of the 728 firms participating in the sample of
638 events for which both Research Insights data are available. The mean values for selected financial
characteristics for the partner firms are provided for the sample as a whole, as well as by industry type. All
of the financial data are reported for the year prior to the joint venture or strategic alliance announcement.
Some firms are represented more than once in the sample. Thus, the figures in this table represent valueweighted averages. Return on assets [equity] is measured as net income divided by the book value of total
assets [equity].
Variable
Net income ($ 100,000)
Total assets ($ 100,000)
Market value of equity ($ 100,000)
Return on assets (%)
Return on equity (%)

Total sample

Banks

Investment services

Insurance

888
84,061
13,325
1.49
13.57

977
98,998
13,903
1.00
14.08

593
76,138
6,630
2.23
14.38

902
63,147
15,745
2.04
12.26

frequency of announcements by year indicates that only 29 of the 638 (4.54%) announcements occurred during the 1985 to 1989 period. After 1989, the pace of announcements per year accelerated. The number of annual announcements increased
from 35 in 1990 to 78 in 1998. While this may in part reflect the broader scope of
coverage by SDC in the 1990s, it may also be indicative of increased commercial
bank activities due to deregulation.
Panel B, Table 1, shows a breakdown of the sample by type of cooperative
activity. Three hundred eighty-five of the 638 announcements are for joint ventures
involving 420 partner firms. The remaining 253 transactions are strategic alliances
with 308 firms participating. It is interesting to note that while for joint ventures the
average number of firms per announcement is 1.09, it is 1.42 for strategic alliances.
This difference may be explained in terms of the nature of the collaborative activity
and the sharing of control in the venture. While joint ventures typically involve an
equity stake and ownership implications, alliances are less constricting in terms of
governance and more focused on general resource sharing.
The breakdown of the sample by number of announcements and SIC classification of firms is provided in Table 1, Panel C. There are 407 banks associated with 343
announcements, 96 investment services firms associated with 92 announcements, and
225 insurance firms associated with 203 announcements.
A summary of the financial characteristics of the sample firms is provided in
Table 2. Mean values of selected variables are shown for the total sample and for
each industry subgroup and measure the respective variables in the year of the firms
cooperative activity announcement. On a value-weighted basis,7 the sample is made

7 Some

firms are represented more than once in the sample (e.g., a firm that appears in our total sample
ten times would have all of its ten preannouncement total asset figures included in the computation).

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223

up of large firms averaging $84.1 billion in total assets. The largest firms in terms of
total assets are in the banking industry, averaging almost $99 billion, while insurance
firms are the smallest on average ($63.1 billion in total assets). Market capitalization
averages $13.3 billion for the total sample, with banks, investment services firms,
and insurance firms averaging $13.9, $6.6, and $15.7 billion, respectively. Investment
services and insurance companies generated average return on assets of over 2% in
the year prior to the announcement of the joint venture or strategic alliance, while
banks lagged behind with an average ROA of slightly less than 1%. Return on equity
for all three types of financial services firms ranged from 12% to 15%.
Interesting details are revealed when the participation characteristics of the cooperative activity firms are examined. Panel A of Table 3 shows the variation in the
number of partners for the sample of announcements. The number of partners in any
of these transactions ranges from the required minimum of two to 16. Just over 74%,
or 539 of these announcements, involve two partner firms. How often these partnering
firms engage in these cooperative activities is shown in Panel B, Table 3. These data
show the number of times (and how many) firms participated in these events. For
example, 83 firms were involved in a single cooperative activity during the sample
period, while another 29 firms participated in two transactions. The average firm engaged in 3.41 cooperative activities during the sample period. Seventeen firms were
involved in more than ten joint ventures or strategic alliances. These include Equitable
Life and First Chicago (11 events each), as well as Bank of America (32), Citigroup
(39), and American International Group (55). Thus, we see that these cooperative activities are an important element of the growth strategies for these firms, particularly
the larger firms in their respective industries.
Earlier, we addressed two important strategic competitive considerations. First,
we noted that firms pursue cooperative strategies such as joint ventures and strategic
alliances in search of new skills, technology, or resources. The cooperative activities may also be beneficial when entering new geographic or product markets where
barriers to entry make partnering an attractive alternative. We incorporate these important considerations into our analysis by considering whether the transaction is:
(i) domestic or international, and (ii) horizontal or diversifying. Table 4 shows the
distribution of the sample in terms of geographic strategy (Panel A), product or
business relatedness (Panel B), and the various combinations of the two together
(Panel C).
Four hundred and forty-two, or almost 61%, of the firms are involved in domestic
transactions, while 278, or 38%, are associated with a cooperative activity that involves
at least one foreign entity. Domestic activities for banks account for almost 65%, while
representing 71% for investment services firms. Only for the insurance firms is the
ratio of domestic to international activities nearly even.
Panel B, Table 4 shows that horizontal activities occur about 26% of the time.
The vast majority of transactions, about 74%, are of the diversifying type. These
results indicate that firms in the financial services industries are seeking to acquire
complementary competencies from nonrelated partners. Sample financial institutions

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Table 3
Participation characteristics of the cooperative activity firms
The table shows the frequency of joint venture and strategic alliance activity by all participants. The number
of financial services firms in the sample is 728. Panel A shows the number of announcements that involve
the specified number of partners. Panel B shows the number of firms involved in a particular number of
events over the sample period. The names (and frequency of participation) of the financial services firms
in the sample with more than 10 activities each during the sample period are also provided.
Panel A: Announcements by number of partner firms
Number of
partners

Number of
announcements

2
3
4
5
6
7
8
9
15
16
Total announcements

539
60
19
5
4
3
3
2
1
2
638

Panel B: Frequency of cooperative activity use by partner firms

Number of
events

Number of
firms

1
2
3 to 5
6 to 8
11 to 12

83
29
43
15
4

14 to 16

18 to 20

23
29
32
39
55

1
1
1
1
1

Firm name

Equitable Life Insurance, First Chicago (11 each)

JP Morgan, PNC (12 each)
Bank of Boston, First Union, Wells Fargo (14 each)
Cigna, State Street (15 each)
Aetna (16)
Mellon (18)
Bank One (20)
Bankers Trust
Chase Manhattan
Bank of America
Citigroup
American International Group

engaged in joint ventures across a wide spectrum of complementary industries such

as data processing, information technology, and other financial services.
Panel C in Table 4 shows the interactive geographic and product strategies.
While most of the strategic combinations are domestic- and product-diversifying,

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225

Table 4
Distribution of announcing firms by strategic/competitive motives
This table provides the distribution of announcing firms by strategic and/or competitive motives. All firms
involved in a domestic cooperative activity are U.S. firms. International cooperative activities involved
at least one non-U.S. firm. A horizontal cooperative activity is one in which both the financial services
parent firm and the cooperative activity are in the same industry. A diversifying cooperative activity is one
in which the financial services parent firm and the cooperative activity are not in the same industry.
Category

Banks

Investment services

Insurance

Total

264
137
6
407

68
28
0
96

110
113
2
225

442
278
8
728

89
215
5
407

24
72
0
96

74
150
1
225

187
535
6
728

49
210
40
98
10
407

15
53
9
19
0
96

34
77
40
73
2
225

98
340
88
190
12
728

Panel A: Geographic relatedness

Domestic
International
Undisclosed
Total
Panel B: Business relatedness
Horizontal
Diversifying
Undisclosed
Total
Panel C: Strategic combinations
Domestic-horizontal
Domestic-diversifying
International-horizontal
International-diversifying
Undisclosed
Total

190 (26%) are both geographic- and business-diversifying. The results indicate that
financial services firms readily source strategic assets in foreign as well as domestic
markets.

4.2. Event study results

The event study results are presented in Table 5. We present the cumulative abnormal returns (CARs) for the (1,+1) and (1,0) windows for the sample of 728
financial services announcements related to 638 joint venture or strategic alliance
events. Returns data for event study methodology were available for 513 announcements. Results are presented for the total sample (Panel A), for each industry classification in the sample (Panel B), and for each of the strategic competitive motives
(Panel C).
For the total sample, the (1,+1) and (1,0) event window abnormal returns
are 0.66% and 0.51%, respectively, both significant at the 1% level. For a firm with a
market value of about $13 billion, the 0.66% abnormal return represents an increase

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K. C. Gleason et al./The Financial Review 38 (2003) 213234

Table 5
Cumulative abnormal returns by industry classification and strategic/competitive motives
This table presents the announcement period cumulative abnormal returns (CARs) for the (1,+1), and
(1, 0) event period windows for the sample of 728 financial services firms participating in 638 joint venture
or strategic alliance events. Abnormal returns are calculated using the market model estimated from 110
to 11 days prior to the event announcement. The CRSP equally-weighted market index is used. CARs
represent the cumulative market model-adjusted change over the relevant event window. The t statistics
(given in parentheses) are based on the standardized cross-sectional method. The number of positive and
negative CARs for the (1,+1) window (+/) are reported in the last column, with the Z statistic for the
nonparametric generalized sign test reported in parentheses under +/. Domestic, international, horizontal,
and diversifying cooperative activities are defined in Table 4.
CAR event windows
No.

(1, +1)

(1, 0)

+/

513

0.66 (4.88)

0.51 (4.67)

297/216 (4.66)

0.69 (3.72)
0.52 (1.41)
0.65 (2.81)

0.45 (2.97)
0.60 (1.96)
0.58 (3.08)

157/121 (3.96)
34/35 (0.35)
106/60 (4.07)

0.59 (3.40)
0.72 (3.56)
0.84 (3.31)
0.57 (3.98)

0.45 (3.20)
0.60 (3.63)
0.61 (2.96)
0.47 (3.99)

176/135 (3.23)
116/81 (3.07)
80/54 (2.68)
214/162 (3.68)

Panel A: Total sample

Total sample

Panel B: By industry classification

Commercial banks
Investment services
Insurance

278
69
166

Panel C: By strategic motive8

Domestic
International
Horizontal
Diversifying

311
197
134
376

Indicates significant difference from zero at the 0.01 level.

Indicates significant difference from zero at the 0.05 level.

in market value of approximately $86 million. These results provide evidence that
financial services firms partnering in cooperative activities significantly increase
shareholder wealth.
The abnormal returns associated with these cooperative activities can be compared with the abnormal returns reported in previous studies on mergers in the financial services industry. A comprehensive survey article by Palia (1994) shows that
two-thirds of studies on bank mergers report negative abnormal returns for acquiring
banks. Our results, when compared with results from previous bank merger studies, suggest that joint ventures and strategic alliances may be more desirable than

8 There are five announcements that could not be classified according to geographic markets and three
according to product markets. Thus, the combined total sample size for domestic and international subsamples is 508, and for diversifying and horizontal subsamples the total sample size is 510, rather than
513 as given for the total sample.

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K. C. Gleason et al./The Financial Review 38 (2003) 213234

Table 6

Cumulative abnormal returns by combined strategic/competitive motives

This table presents the announcement period cumulative abnormal returns (CARs) for (1, +1) and
(1, 0) event windows for the sample of 728 financial services firms participating in 638 joint venture
or strategic alliance events. Abnormal returns are calculated using the market model estimated from
110 to 11 days prior to the event announcement. CARs represent the cumulative market model-adjusted
change over the relevant event window. The CRSP equally-weighted market index is used. The t statistics
(given in parentheses) are based on the standardized cross-sectional method. The number of positive and
negative CARs for the (1,+1) window (+/) are reported in the last column, with the Z statistic for the
nonparametric generalized sign test reported in parenthesis under +/. Domestic, international, horizontal,
and diversifying cooperative activities are defined in Table 4.
CAR event windows

Panel A: Total

(1, 0)

+/

No.

(1, 1)

67
244
66
131

0.49 (1.23)
0.62 (3.40)
1.18 (3.04)
0.49 (2.22)

0.25 (0.78)
0.51 (3.49)
1.00 (3.13)
0.41 (2.25)

35/32 (0.08)
141/103 (3.28)
44/22 (3.10)
72/59 (1.48)

35
150
28
63

0.11 (0.18)
0.71 (3.30)
1.79 (2.83)
0.37 (1.15)

0.03 (0.07)
0.52 (2.99)
1.22 (2.13)
0.17 (0.67)

14/21 (1.01)
92/58 (0.04)
22/6 (3.01)
35/28 (1.14)

sample9

Domestic-horizontal
Domestic-diversifying
International-horizontal
International-diversifying
Panel B: Commercial banks10
Domestic-horizontal
Domestic-diversifying
International-horizontal
International-diversifying

(continued )

mergers for financial services firms seeking to expand their scale and/or scope of
operations.
Commercial banks and insurance companies in our sample experience significant positive wealth gains of a similar magnitude. The evidence on investment firms
is mixed. For these firms, while both the (1,+1) and (1,0) CARs are positive, only
the latter is statistically significant.
Panel C of Table 5 reports the results for subsamples based on strategic/
competitive motives.11 The CARs for all four subsamples are significantly

9 There are five announcements that could not be classified by geographic or product markets. Thus, the
combined number of geographic and product events analyzed is 508 rather than 513 as stated for the total
sample in Table 5.
10 Two announcements for which CARs could be generated could not be classified by geographic or
product markets and are not included in the analysis, accounting for the 276 bank announcements out of
278 total bank announcements represented in Table 5.
11 The

CARs for the subsamples for joint ventures and strategic alliances are not significantly different
from each other. Thus, we do not stratify our sample based on the type of cooperative activity.

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K. C. Gleason et al./The Financial Review 38 (2003) 213234

Table 6 (continued )
Cumulative abnormal returns by combined strategic/competitive motives
CAR event windows
No.

(1, 1)

(1, 0)

+/

9
42
7
11

1.54 (1.41)
0.29 (0.68)
1.60 (1.27)
0.10 (0.12)

0.73 (0.82)
0.41 (1.15)
1.87 (1.82)
0.40 (0.54)

6/3 (1.18)
19/23 (0.25)
5/2 (1.32)
4/7 (0.75)

23
52
31
57

0.64 (1.43)
0.57 (1.33)
0.57 (1.09)
0.74 (1.95)

0.39 (1.07)
0.53 (1.52)
0.67 (1.58)
0.66 (2.13)

15/8 (1.49)
30/22 (1.51)
17/14 (0.85)
33/24 (1.40)

Panel C: Investment services

Domestic-horizontal
Domestic-diversifying
International-horizontal
International-diversifying
Panel D: Insurance12
Domestic-horizontal
Domestic-diversifying
International-horizontal
International-diversifying

Indicates significant difference from zero at the 0.01 level.

Indicates significant difference from zero at the 0.05 level.
Indicates significant difference from zero at the 0.10 level.

positive. At 0.84% for the (1,+1) window, they are the highest for horizontal cooperative activities, followed by international cooperative strategies.
The parametric results for the (1,+1) window are confirmed by the nonparametric generalized sign tests for the event window. Thus, we see that these cooperative strategies are value-generating activities for banks, insurance companies, and
to a lesser extent, other investment services firms. These significant results hold regardless of the strategic/competitive motivations involved (i.e., these results hold for
transactions that are domestic, international, horizontal, or diversifying).
Next, we examine whether certain combinations of transaction motives provide
additional insights into how these firms in the financial services industries utilize
joint ventures and strategic alliances. To do this, we look at the following motive
classifications: domestic-horizontal, domestic-diversifying, international-horizontal,
and international-diversifying. The results for this part of our analysis are presented
in Table 6 for the total sample (Panel A), for banks (Panel B), for investment services
(Panel C), and for insurance companies (Panel D).
For the total sample, those transactions that expand the domestic scope of the
firms operations (domestic-diversifying) add value to the sample partner firms. Expanding the international scale of the firms (international-horizontal) as well as the
international scope of firms (international-diversifying) results in positive abnormal

12 Table 5 shows that the total number of announcements for insurance firms is 166. However, three could
not be classified according to their product or geographic status. Therefore, the sum of the insurance
subsample observations in this table is 163.

K. C. Gleason et al./The Financial Review 38 (2003) 213234

229

returns of 1.18% and 0.49% for the (1, +1) event window, respectively. Both of
these CARs are significant at the 1% level. Domestic-horizontal transactions generate
positive returns over both event windows, but neither is statistically significant.
Panels B through D show the results for these strategic combinations by type of
financial services industry. What is striking about these results is that they indicate
how these gains are generated across the sample industries. Specifically, the banking industry drives the results for domestic-diversifying and international-horizontal
combinations, and the insurance industry results drive the international-diversifying
combinations. Furthermore, the results for banks show that diversifying domestically,
and expanding horizontally internationally, produce significant, positive abnormal
returns. For investment services firms, international-horizontal transactions generate abnormal returns averaging 1.87%, which are significant at the 10% level for
the (1, 0) window. However, it should be noted that this subsample includes only
seven announcements. Diversifying transactions abroad involving insurance companies generate significant positive returns at the 5% level for both of the near-term
windows (0.74% and 0.66%, respectively).
Finally, we examine CARs by time subsamples (19851986, 19871989, 1990
1993, and 19941998), representing changes in the regulatory environment related
to allowable bank activities.13 However, we find no significant differences in CARs
across time periods and do not report the results in Table 6.
The results in Table 6 provide insights into which strategic motives generate
value for which type of financial services firm. The most significant activity is for
the banking subsample. Activities involving domestic diversification and expansion
of the scale of operations internationally add value to bank shareholder wealth when
conducted through a cooperative mode. For the other two subgroups, international
cooperation exhibits positive wealth effects, although for different reasons. While
investment services firms benefit from international horizontal efforts, significant
gains for insurance companies come from ventures and alliances that diversify or
expand their scope of operations internationally.

4.3. Long-horizon holding period returns

In Table 7, we examine the long-horizon average holding period abnormal returns (AHAR) generated by these transactions for the 187 announcements without

13 Specifically, we are referring to pieces of legislation aimed at expanding products, services, and markets

in which U.S. commercial banks are active the 1987 Competitive Equality Banking Act (CEBA), which
prevented creation of new nonbank banks by defining a bank as any firm that accepts deposits, changes
in the early 1990s to regulatory tolerance for relaxation of Glass-Steagall restrictions (cases of holding
companies being allowed to issue and underwrite a variety of securities and taking limited equity stakes
in nonbank firms), and the 1994 Riegle-Neal Interstate Banking and Branching Efficiency Act, which
changed the competitive environment by allowing U.S. and non-domestic banks to expand interstate by
consolidating out-of-state bank subsidiaries into a branch network and/or acquiring banks. Comparable
changes in regulatory regime began in Europe primarily in January of 1998.

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Table 7
Longhorizon holding period abnormal returns
This table reports the long-horizon average holding-period abnormal returns (AHAR) for our sample
firms. We compute long-horizon holding period raw returns for the sample firms (HPRFi) and for the
matched firms (HPRCi). AHARi = HPRFi HPRCi. The two-tailed significance tests are based on the
standardized cross-sectional method. HPRFi, HPRCi and AHARi are calculated starting with the month
after the announcement date for six-, 12-, and 18-month holding periods. Firms in the sample with multiple
transactions that confound the long-horizon analysis are omitted from the analysis. Further, due to size
considerations, we are unable to match certain firms in the sample. Thus, the sample sizes in these tests
are smaller than those in the near-term event study.
1-year HPR event windows
Max. no.14

(1, 6)

(1, 12)

(1, 18)

4.86 (1.70)
5.46 (2.44)
4.33 (1.13)
4.35 (1.49)

7.18 (2.62)
7.24 (2.03)
9.44 (1.86)
6.29 (0.97)

7.94 (2.00)
7.45 (2.12)
10.26 (1.98)
7.40 (1.74)

6.90 (2.02)
7.90 (2.28)
7.76 (1.87)
6.94 (2.12)

9.40 (2.05)
4.05 (0.66)
14.79 (2.28)
5.10 (1.12)

Panel A: AHAR by industry classification

Total sample
Commercial banks
Investment services
Insurance

187
86
37
64

Panel B: AHAR by strategic/competitive motive15

Domestic
International
Horizontal
Diversifying

134
52
54
131

5.13 (1.89)
4.15 (1.40)
7.48 (1.79)
3.78 (1.69)

Indicates significant difference from zero at the 0.01 level.

Indicates significant difference from zero at the 0.05 level.
Indicates significant difference from zero at the 0.10 level.

confounding events for which a matched firm could be identified. The reported returns are the difference between the returns of our sample firms less those of the
matched sample. We look at (+1,+6), (+1,+12), and (+1,+18) month long-horizon
event windows. Panel A reports the returns for the total sample and by industry type,
while Panel B reports those for the four strategic/competitive motives.
For the sample as a whole, we observe significant positive AHARs across all
three event windows, ranging from 4.86% for six months to 7.94% for the 18-month
period (significant at least at the 5% level). Abnormal returns to bank shareholders

14 The sample size shows the maximum number of announcements for which data are available for any
of the three windows. For example, for the (1,6) window, 187 returns could be calculated, but the number
declines to 135 as the time horizon extends to 18 months.
15 Panel A shows that the total number of events for which we could estimate AHARs for the (1,6) month
event window is 187. However, one event could not be classified with regard to its geographic status. Thus,
domestic and international activities combined result in analysis of 186 events. Similarly, the diversification
status for two events could not be determined, resulting in analysis of 185 events.

K. C. Gleason et al./The Financial Review 38 (2003) 213234

231

are also significant across all three windows at the 5% level. Investment services
firm returns are significant for 12- and 18-month horizons only (9.44% and 10.26%,
respectively). Only the 12-month window shows significant returns (at the 10% level)
for the insurance subsample.
Positive abnormal returns are observed for all four strategic competitive motives
for the (+1, +6) month window, and are statistically significant for all motives except international. For the (+1, +12) month window, the returns for all four motive
categories are significant and range from 6.90% for all domestic events to 7.90%
for international transactions. Over the 18-month period, only the domestic and the
horizontal activities add significant value. Domestic cooperative activities generate
returns of 9.29%, while horizontal activities result in AHARs of 14.79%. Both motive
types are significant at the 5% level.

5. Conclusion
Several studies have looked at merger and acquisition strategies in the financial services industries. More recently, consolidation activity in these industries has
captured the attention of researchers as well. A very important and emerging component of the growth strategy of these activities is cooperative activity made up of
joint ventures and strategic alliances, and these activities have received little attention,
relative to the volume of work that has been done on bank mergers and acquisitions.
In this study, we examine how firms in the banking, investment services, and insurance industries use these cooperative strategies and whether these strategies generate
wealth-increasing benefits for their shareholders.
This analysis contributes to our understanding of both the motives for these cooperative strategies, as well as the impact of these activities on the short-term and
long-term performance of participating firms. Our analysis indicates that there is a
significant increase in the wealth of the shareholders of firms that announce their participation in cooperative strategies. Banks and insurance companies are better able to
extract gains through cooperative activities compared to investment services firms.
However, this result may be more of an artifact related to the relatively smaller sample size of investment services firms. International activities and horizontal activities
dominate domestic and diversifying activities, respectively. As expected, when cooperative strategies are both international and horizontal, the gains are larger than those
associated with the other three combination motives. Financial services firms that can
expand their scope of operations are able to capitalize on their core competencies,
and this strategic advantage is recognized by investors. This factor is particularly
significant for banks, which appear to possess the ability to successfully export their
expertise in their core area through joint ventures and strategic alliances.
The long-horizon holding period returns analysis indicates that the stock prices
of participating firms appreciate more than those of matching firms. Further, even
though the results for investment services firms are mixed in the short run, in the long
run these firms also gain from entering into cooperative activities.

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K. C. Gleason et al./The Financial Review 38 (2003) 213234

The results of this paper hold significant implications for managers of financial services firms. In general, the use of joint ventures and strategic alliances by
financial services firms holds the potential for increasing profits. Second, expanding
horizontally into international markets provides financial services firms with the opportunity to capitalize on their domestic expertise and reap handsome profits. In an
environment that is becoming increasingly competitive, cooperative activities provide
financial services firms with strategic and competitive advantages through which they
can improve financial performance.

Appendix A: Sample descriptions of cooperative activity

announcements
The following descriptive material provides examples of the type of cooperative
activities analyzed in this study. The information provided is taken directly from the
Securities Data Corporation International Joint Ventures database.

A.1. Joint ventures

1. Banc One Corp entered into a joint venture with BankAmerica Corp and
Chemical Banking Corp to operate a nationwide system for microchipembedded smart cards. The venture was called SmartCash. The smart
card was to enable value from a cardholders deposit or credit account to
be loaded on it. The card could then be used in place of cash and coins for
purchases targeted at the $20 and under range. Other financial institutions
were expected to join the joint venture. Financial terms were not disclosed
(August 16, 1995) [D R].
2. Marsh & McLennan Company and J.P. Morgan & Co. formed a joint venture
company to exploit the rising global interest in the catastrophe reinsurance
market. The market had suffered losses after hurricanes Andrew and Iniki
in 1992 (November 6, 1992) [D C].
3. Citibank NA and the Government of Saudi Arabia signed an agreement to
form Saudi American Bank, a joint venture to provide banking services in
Saudi Arabia (January 1, 1990) [I R].
4. State Street Boston Corp and an undisclosed European bank formed a joint
venture to provide foreign currency trading services to European companies.
The joint venture was to be named Galleon Capital Corp (April 19, 1995)
[I C].

A.2. Strategic alliances

1. Ameritech and Citibank formed a strategic alliance to offer interactive banking services. The companies planned to combine telephone and banking
services delivered to the home of the consumer using screen telephones.
Consumers were to do their banking through these interactive services. The
telephones were equipped with digital display screens and a typewriter-like

K. C. Gleason et al./The Financial Review 38 (2003) 213234

233

keyboard. Ameritech and Citibank planned to market the telephones directly to consumers. Financial terms were not disclosed (November 9, 1993)
[D R].
2. Smoky Mountain Technologies, a unit of UniComp Inc., and First Tennessee
National Corp entered into a strategic alliance to provide a combined credit
card, debit card, and frequent shopper program targeted at the quick-service
food market (May 30, 1997) [D C].
3. Lippo Ltd., a Philippines unit of Lippo Capital, entered into a strategic alliance with First Union Corp. The purpose of the alliance was to combine
their marketing efforts into a trade finance network in Southeast Asia and
the Pacific Rim. Under the terms of the agreement, the network would include seven existing Lippo offices in Southeast Asia and the Pacific Rim. In
addition, First Union planned to open a Los Angeles office at Lippo Bank, to
process letters of credit related services. Financial details were not disclosed
(February 15, 1995) [I C].
4. Banco Nacional de Mexico entered into a strategic alliance with Wells Fargo
Bank, a unit of Wells Fargo & Co., to develop a series of banking products
and services. Under the terms of the agreement, the two banks would offer
foreign trade financing and related products to firms operating in each of their
respective markets. In addition, the banks would offer financial products to
firms and individuals with operations in Mexico and the United States, with
each attending clients of the other in its home market. The banks believed
the alliance would capitalize on the rapidly expanding interaction between
their respective customer bases, which was enhanced by the North American
Free Trade Agreement. Financial details were not disclosed (May 15, 1995)
[I R].
Legend: D = Domestic

I = International

R = Related

C = Cross-Product

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