Strategic alliance, trust and accounting performance stability

Abstract In this paper, we document tension in the effects of strategic alliances on partner firms' profitability and stability in China in that the formation of strategic alliances decreases partner firms' short‐term profitability but increases their operating stability. However, the unique institutional features of the Chinese market, namely, relational networks and the stakeholder‐driven governance model, can relieve this tension. We also find that societal trust, a remedy for weak formal governance and legal protection, helps mitigate the deterioration of profitability and strengthens the positive relationship between strategic alliances and stability. Lastly, we document a positive effect of strategic alliances on partner firms' Tobin's Q , suggesting that the market values a powerful network of stakeholders related through alliances. Our study emphasises the distinct mechanisms of value creation through strategic alliances in emerging markets and the role of market institutions, governance, and socio‐economic structures in shaping these mechanisms.