Does the use of project finance enhance shareholder value upon announcement of international joint ventures (IJVs)?
Cardiff Metropolitan University
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The empirical evidence relating to the stock market reaction to domestic joint ventures (JV) announcements suggest that the mean abnormal returns (MARs) and cumulative abnormal returns (CARs) are consistently positive, whilst those of international joint venture (IJVs) are mixed. One neglected but obvious influence of the stock market response to IJV announcements is the way they are financed. The preference for project finance over corporate finance in the financing of IJVs may have a role to play in this context. Compared with capital structure theories, this gap is seen as quantifying the role of the type of structure or debt (project or corporate finance) plays in shareholder value creation upon announcement. Using a cross-sectional study comprising of a finnal sample of 394 IJV announcements made from the years 2005 to 2010 and retrieved from the Securities Data Company (SDC) database, an event study methodology was used to derive MARs and CARs in a 2l-day window (-10,+10). The MARs and CARs are integrated into regression analyses to examine the specific role the type of finance plays in shareholder value creation upon announcement by controlling for project specific, host nation characteristics and sponsor-specific variables. The findings of the research establish that IJVs on average create value upon announcement but does not have a lasting impact on stock market valuation. As expected, the financial markets' response to IJV announcement during and after the global financial crisis (2008-2010) was not favourable. It was also found that the choice of finance matters in the market response to IJV announcements with project finance having a higher probability of eliciting a significant positive market reaction. Finally, the study revealed that whilst sector and gearing has an impact on MARs and CARs, the legal origin of the host country of the IJV did not make an impact upon announcement.
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