Financial health and partner attractiveness in the market for inter-firm collaboration

We propose that in addition to its resources and capabilities, a firm's capital structure and financial health will act as an important determinant of its attractiveness as an alliance partner. Alliances with leveraged firms are prone to unplanned termination due to financial distress, which puts at risk the value embedded in the collaboration. As a result, ceteris paribus, highly leveraged firms will be viewed as less desirable partners in the market for interfirm collaboration when compared to low leverage firms. In support of this proposition, we find that when forming an alliance firms tend to partner with other firms with similar levels of leverage: low-leverage firms partner with other low-leverage firms while high-leverage firms partner with other high-leverage firms, as well as with lower quality ones. Furthermore, we show that alliances with highly leveraged firms are more likely to involve equity participation as a form of ex post protection, especially when they involve partners with relatively lower leverage. Finally, we show that leverage is negatively related to the intensity of alliance activity, suggesting that firms also maintain lower leverage in their capital structure in order to attract potential partners. Overall our results imply that financial policies regarding capital structure have an important role to play in alliancing activity