This study examines the effect of financial constraints on firms’ decision to form strategic alliances as a choice of growth strategies. Drawing on agency theory, we argue that financially constrained firms engage in strategic alliances to a greater extent due to the disciplinary role of financial constraints. Nevertheless, financially constrained firms may use strategic alliances as a means to gather more resources from alliance partners. Thus, we further examine agency perspective versus resource dependence perspective through institutional ownership and board size as boundary conditions respectively.
We test our hypotheses on a sample of all publicly traded industrial U.S. firms covering the years 1985–2017 that engaged in strategic alliances.
We find that financially constrained firms increase strategic alliances. Moreover, high institutional ownership acts as the monitoring mechanism, which weakens the positive association between financial constraints and strategic alliances.
This study provides a better understanding on financially constrained firms’ decision to form strategic alliances by examining the monitoring role of institutional investors and the resource provision role of the board of directors.
