The impact of partners’ financial condition on alliance contract design: evidence from biotech-pharma alliances

Abstract

While prior research considered alliance contract design as the result of transaction features, we study how firm-level financial health impacts the contractual characteristics of alliances. In particular, we investigate the relation between a firm’s risk of financial distress and the contractual complexity of the alliances it forms. We find partners adopt more complex contracts to stringently monitor the behavior of distressed firms. Similarly, we also find that alliances involving distressed partners tend to exhibit more complex termination provisions, arguably to mitigate the costs imposed in case financial problems triggered alliance unplanned termination.