The Design of Equity Ownership Structure in Inter-Firm Relationships: Do Managers Choose According to Theory?

Abstract

Theories explaining the equity ownership structure of inter-firm relationships, such as the resource-based view or transaction cost economics, commonly assume a significant role for managerial choice, but this assumption is rarely assessed for its realism. In this study, we use the policy capture methodology to directly assess whether managers choose according to theory (and which theory). In a sample of 66 experienced managers, we find that managerial choices of equity ownership are indeed influenced both by competitive advantage and transaction hazards, though to a greater extent by competitive advantage. Further, only competitive advantage influences managers’ choices about the extent of equity ownership in their partner; transaction hazards motivate the choice of some equity over none. We discuss implications for how inter-firm relationships are and ought to be designed.

Keywords: equity structure, inter-firm relations, inter-organizational design