Inter-Firm Connections, Alliance Formation and the Value Created by Alliances

We investigate the impact of inter-firm connections on alliances. We find that both professional connections, borne out of current employment ties and board interlocks along with social connections, borne out of past employment ties and educational ties, increase the likelihood of alliance formation. In addition, the market reacts more favorably to alliance announcements in the presence of such connections. Moreover, the positive valuation effects associated with connections increase with the degree of information asymmetry between the partner firms. Our findings are consistent with inter-firm connections creating value because it helps firms identify suitable alliance partners and facilitates the flow of information between partner firms, thereby reducing moral hazard concerns and the risk of ex-post opportunistic behavior