Entry mode and firm value: Evidence from investing firms in mainland China

• Published in: Pacific-Basin finance journal 2019-12, Vol.58, p.101208, Article 101208
• Main Authors: Lu, Hsueh-Tien, Keung, Edmund C.
• Format: Article
• Language: English
• Subjects: Firm value; Foreign direct investment; Foreign entry mode
• ISSN: 0927-538X; 1879-0585
• DOI: 10.1016/j.pacfin.2019.101208

We examine whether forming a joint venture creates more or less value relative to establishing a wholly owned subsidiary. Using a unique dataset of 1567 Taiwanese listed firms (19,090 firm-years) from 2000 to 2016, we find geographical diversification to mainland China results in valuation discounts, which is attributed to overall investments, wholly owned subsidiaries, and joint ventures. Further, we provide evidence that firms forming joint ventures generate less firm value than firms creating wholly owned subsidiaries in mainland China. This finding could be a potential explanation for why Taiwanese listed firms are increasingly choosing the wholly owned subsidiary mode to invest in firms in mainland China. •This paper adopts an agency theory perspective to answer whether forming a joint venture creates more or less value relative to establishing a wholly owned subsidiary.•We find geographical diversification to mainland China results in valuation discounts, which is attributed to overall investments, wholly owned subsidiaries, and joint ventures.•We present evidence that the destruction to firm value is greater when firms choose joint venture as entry mode, than when firms adopt wholly owned subsidiary.•Our results suggest the joint venture discount is a possible explanation for the phenomenon that the percentage of joint ventures (wholly owned subsidiaries) are gradually reducing (increasing) over time in mainland China.