¹Sam M. Walton College of Business, University of Arkansas, Fayetteville, USA

Correspondence: T Jandik, Associate Professor of Finance, Sam M. Walton College of Business, University of Arkansas, Business Building 302, Fayetteville, AR 72701, USA. Tel: +1 479 575 6147; Fax: +1 479 575 8407; E-mail: tjandik@walton.uark.edu

Received 13 June 2006; Revised 29 February 2008; Accepted 3 March 2008; Published online 4 December 2008.

Abstract

We examine how the organizational structure for diversification decisions involving firms from different countries is affected by the institutional context of the target country. Our theoretical analysis suggests that, as legal systems improve and information asymmetry is reduced, a transition from relational, "firm-like" arrangements to arm's length, "market-like" arrangements takes place. If institutions continue to improve, eventually a threshold is crossed after which arm's length deals edge out internal firm contracting. We provide an empirical test of the model using the sample of international strategic alliances, joint ventures and cross-border mergers involving US firms. Our empirical findings support the predictions of the theory. In addition, we document that US companies entering organizational structures predicted by our model are associated with greater abnormal returns around deal announcements.