This paper examines how contracts and their adaptations over the course of strategic alliances influence alliance innovation outcome. Drawing on transaction cost economics, we argue that contract adaptation increases efficiency as the adapted contract re-aligns to transactional attributes, which, in turn, positively influences the alliance innovation outcome. Moreover, we introduce the concept of alliance partners embracing contingencies and argue that contingency adaptability clauses employed in the initial contract positively moderate the baseline relationship. We test our theory on a longitudinal dataset of 340 alliances from the biopharmaceutical industry. Our study contributes to strategic alliance research by explaining if and under which circumstances an innovation outcome of a strategic alliance, i.e., a drug approval in the biopharmaceutical context, is influenced through contracts and their adaptation as the alliance evolves over time. Empirically, employing an instrumental variable regression approach helps us to mitigate potential endogeneity concerns.
