Investing in Our Partners

Tanvi Jindal, Joint Program in Financial Economics PhD student

Why do non-financial firms take partial equity stakes in other non-financial firms? I document this phenomenon using a novel dataset constructed from SEC 13D and 13G filings covering the period 2000–2024 merged with hand-collected data on perational relationships. I have 1,421 unique issuer-investor pairs. I find that partial equity stakes are concentrated in technology-intensive and information-services industries. Issuers—the firms receiving investment—are substantially younger, smaller, more R&D-intensive, and less profitable than their investors, who tend to be large, mature, and profitable firms in media, retail, and industrial sectors. Operational relationships commonly entail co-development along with supply chain, licensing or distribution relationships. I also find that most operational relationships occur around the first observed equity stake, and that the equity stakes largely remain partial – indicating that partial equity contracting between operational partners is a persistent contracting mechanism. In order to rationalize these patterns, I develop a bilateral moral hazard framework in which a large incumbent takes an equity stake in a smaller, innovative partner to align incentives over jointly productive but non-contractible effort. The optimal equity share depends on the relative importance of each party’s effort in production of the output.