Value of strategic alliances: Evidence from the bond market

The objective of this study is to examine the relationship between strategic alliances and the cost of debt, proxied by the at-issue yield spread of bond offerings. We hypothesize that the participation of strategic alliances lowers a firm's cost of debt because it improves the level and stability of future profit streams and reduces information asymmetry among investors. Based on 2150 bond-issuing firms during the period 1985-2009, we find evidence consistent with this argument. Furthermore, we find that the mitigating effect of strategic alliances on the debt cost is much more pronounced for firms with higher product market competition, more severe financial constraints, and greater R&D investments. Taken together, this is the first paper to examine the importance of strategic alliances in the bond market and our results highlight that corporate alliance activity is valued outside the equity market and creates additional benefits that result in lower cost of debt financing.