exploration, exploitation, strategic alliances, debt overhang theory, debt


When undertaking strategic alliances, managers face a fundamental choice to pursue alliances that allow them to exploit the value of current firm assets or alliances that allow them to explore new trajectories for the firm. To answer this question, we tested our proposed theoretical framework using 652 US-based publicly traded pharmaceutical firms between 1990 and 2012. Findings suggest that exploitation alliances have higher impact on firm performance in the short and long run than exploration alliances. Consistent with the debt overhang problem presented by Myers (1977), our findings confirm that high-leverage firms have a higher inclination toward exploitation alliance formations over exploration alliance formations. Next, we examine whether financial leverage, an endogenous variable, mitigates agency costs and improves the relationship between a firm’s engagement in strategic alliances and its performance. Findings indicate that debtholders act as monitoring agents and are able to mitigate the manager–stockholder agency problem efficiently and improve firm performance both in the short and long run when firms engage in exploitation alliances relative to exploration alliances.