Joint ventures between US MNCs and foreign governments

Purpose - The purpose of this paper is to determine the initial stock price reaction and long‐run returns for joint venture announcements between US MNCs and foreign governments as well as the firm characteristics and political risk factors of the foreign governments that affect the abnormal returns. In addition we determine changes in total and systematic risk following the joint venture. Design/methodology/approach - Announcement abnormal returns are calculated using event study cumulative abnormal returns. Long‐run returns use a buy and hold methodology. Cross section regressions are performed on both the announcement and long run returns. Findings - Announcement abnormal returns are a positive 0.37 percent; however, the long‐run returns are a significant −3.99 percent the end of the first year. Both short‐run and long‐run returns are higher when the level of internal conflict is low, and surprisingly when the level of corruption is high. Also, surprisingly, short‐run returns are higher when ethnic violence is higher, but, as expected, long‐run returns are higher when there is higher democratic stability. Research limitations/implications - One implication is that when US managers are confronted by foreign government corruption, there may be a conflict between the success of the project and the ethical/legal requirements of the company. Originality/value - The paper focuses on joint ventures with foreign governments rather than the usual foreign companies. Also, unlike previous papers that have used only one measure of political risk, this paper uses five of the PRS categories of political risk.