A reexamination of the motives and gains in joint ventures

We distinguish between horizontal and vertical joint ventures, and find correspondingly different valuation effects. Horizontal joint ventures create synergistic gains that are shared by the partners. In contrast, vertical joint ventures generate gains only for suppliers. This is similar to the pattern we find for simple contracts, which suggests economic similarities between vertical joint ventures and contracts. Analyzing firms' choices between these contracting options, we find that firms choose vertical joint ventures over simple contracts when potential hold-up problems are severe and when suppliers face finance constraints. The results do not support a risk-sharing motive for joint ventures.