The Effects of Cultural Differences on Cross-Border
Mergers and Acquisitions: Evidence from the European
Union
Anne Karlijn Meyer Student number: 11054263
Faculty: BSc Economie en Bedrijfskunde Track: Finance and Organisation
Supervisor: dr. S. Onderstal July 2018
Abstract
Mergers and acquisitions (M&A’s) are an important part of the corporate financial world. By combining two firms value can be created. Cultural differences play an important role in M&A decision-making and are likely to impact the performance of M&A’s. These differences between the two companies of a M&A deal could be a potential obstacle in achieving the desired benefits. But how do cultural differences impact mergers and
acquisitions? This thesis investigates the effect of cultural differences between the acquiring and target firm on the abnormal returns of the acquirer. A sample of 159 cross-border M&A’s in the period 2011-2017 is investigated. I conclude that for the European Union, cultural differences do not affect the abnormal returns of the acquiring company.
Statement of Originality
This document is written by Student Anne Karlijn Meyer who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Table of contents
1. Introduction ... 4
2. Literature review ... 6
2.1 Cross-border mergers and acquisitions ... 6
2.2 Synergy effects ... 6
2.3 Effect of cultural differences on cross-border M&A’s ... 7
3. Hypothesis... 9
4. Data and Methodology ... 10
4.1 Data collection ... 10
4.2 Data sample ... 10
4.3 Measure of cultural differences ... 12
4.4 Dependent variable ... 13
4.5 The model ... 13
5. Results ... 14
5.1 Summary statistics ... 14
5.2 Results of the regressions ... 15
6. Robustness check ... 16
7. Conclusion ... 17
References ... 19
1. Introduction
The volume of cross-border mergers and acquisitions (M&A’s) has been growing globally, from 23% of total M&A-volume in 1998 to 37% in 2014 (Erel et al., 2012; Thomson Reuters, 2015). Cross-border M&A’s are carried out for the same advantages as domestic ones: economies of scale, accessing scare resources, gaining access to knowledge of the target firm and the most important reason, quick entrance into one or more new and foreign markets (Chakrabarti et al., 2009; Stahl and Voigt, 2008). Cross-border M&A’s are associated with characteristics that might affect the performance of these M&A’s. An important one is differences in culture. Research has been focusing a lot on economic and strategic aspects of M&A’s, but a little research has been done on the human aspects in M&A’s (Cartwright, 1998). Nowadays, gaining knowledge of the target firm is an important resource for achieving the desired benefits in an M&A. But it is clear that geographical and cultural differences complicate the transfer of knowledge (Bresman et al., 1999).
Cultural differences may play a very important role in M&A decision-making.
Countries have their own cultural characteristics; a different language, different religions and different norms and values. People with these different cultural standards have to coordinate with each other (Ahern et al., 2012). Cultural differences are likely to impact the success of mergers and acquisitions. These differences between the acquirer and target could be a potential obstacle in achieving the desired benefits. Companies involved in mergers and acquisitions claim that cultural differences have a negative influence on the value of the company.
The cultural differences between the countries of the acquirer and the target are a frequently used factor in recent studies on cross-border M&A (Chakrabarti et al., 2009; Erel et al., 2012; Ahern et al., 2015; Stahl and Voigt, 2008). Research on the effect of cultural differences on cross-border M&A is still limited and contradictory. Previous research shows that there is an effect of culture on mergers and acquisitions. However, studies have proven that cross-cultural differences affect the performance of M&A’s both positively and
negatively. Morosini et al. (1998) and Chakrabarti et al. (2009) find a positive effect of cultural difference between the target and acquirer on cross-border M&A performance. They state that value can be created by participating in M&A’s with companies from countries with different cultures. On the other hand, Ahern et al. (2015) find that a greater cultural distance leads to lower combined announcement returns in cross-border M&A’s. Also Lim et al. (2016) state that cultural differences have a negative effect on cross-border M&A performance.
The research question of this thesis states: ‘What is the short-term effect of cultural differences on the abnormal return of the acquirer in cross-border mergers and acquisitions within the European Union?’. The hypothesis of this thesis corresponds with the negative effect found in previous research (Ahern et al., 2015; Lim et al., 2016). Cultural differences between the target and the acquiring firm will have a negative effect on the abnormal returns of the acquirer.
In this thesis, I will study the effect of cultural differences between the target and acquiring firm on the abnormal returns of the acquirer in cross-border mergers and
acquisitions. The focus will be on M&A’s within the European Union. A sample of 159 M&A deals between 2011-2017 is used to answer the research question. To measure the effect of cultural differences on the abnormal returns of the acquirer, I will conduct a cross-sectional regression. To measure cultural differences, I use Hofstede’s (2010) six dimension model of national culture.
Although there is evidence on culture conflicts in cross-border M&A’s and on the effects of culture on economic decision-making, research on the impact of cultural differences in cross-border M&A’s is still limited. Yet, this subject has become important. Given the strong worldwide growth in cross-border M&A during the last years, it is essential to get a good understanding of these cross-border M&A’s (Ahern et al., 2012). Previous literature on M&A mainly focuses on domestic M&A deals in the U.S. between publicly listed companies (Erel et al., 2012). This paper will contribute to previous literature in expanding research on the importance of cultural characteristics. Deals in the European Union will be investigated. Also, this research includes and investigates a more recent sample period, namely the period after the financial crisis, which not has been done before.1
The structure of this thesis will be the following. In Chapter 2, relevant literature on cultural differences and cross-border M&A’s is discussed. In Chapter 3, the hypotheses will be discussed. In Chapter 4 the sources and the data used are given and the methodology will be described. In Chapter 5 the results of the regressions will be presented. In Chapter 6, a robustness check is presented. Finally, in Chapter 7, limitations of thesis will be discussed and the conclusion is given.
1 Previous research has been done on data of before and during the financial crisis (Morosini et al., 1998;
2. Literature review
In this section, literature on the subject of mergers and acquisitions is given. At first, cross-border M&A’s are described. Next, the possible synergies created by performing cross-cross-border M&A’s will be discussed. Finally, Hofstede’s (2010) measure of culture is described and different findings of previous research on the effect of cultural differences on the performance of cross-border M&A’s are given.
2.1 Cross-border mergers and acquisitions
Mergers and acquisitions (M&A’s) are transactions of ownership between two companies, where in a merger two companies are combined to form a new company together. In an acquisition one company purchases the another, without a new company being formed. The reason why M&A’s occur, is that it is assumed that combining two firms will generate more profit than a single one.Cross-border M&A’s are undertaken for the reason of the earlier mentioned advantages, such as economies of scale, resource access, the gaining of knowledge and entrance into new and foreign markets (Chakrabarti et al., 2009; Stahl and Voigt, 2008). Entering these markets brings and develops opportunities in abroad countries. Creating market power, spreading risk and lowering tax liabilities are advantages as well (Erel et al., 2012). When the value the two companies together is greater than the sum of the value of the individual companies a growth in revenue and profits can be generated.
Lim and Lee (2016) conclude that a high degree of relatedness between the target and acquiring company makes it more likely for cross-border acquisition deals to succeed.
Differences in culture between target and acquiring firms makes collaboration and
communication between the two parties much more challenging. When people working at the two firms are ingrained in their cultural norms and values, cross-border M&A’s could lead to misunderstandings in decision-making and difficulties during the implementation phase (Bauer et al., 2016). These misunderstandings and difficulties may result in high costs of integration and therefore will decrease the profits.
2.2 Synergy effects
Mergers and acquisitions are carried out if they can create value. The possible benefits of M&A’s are determined by the synergies obtained by the target and acquirer. Synergies arise when the value and profits of two firms combined in M&A’s, is greater than then sum of the two firms separated. Synergy advantages are created by the increase of revenue or the decrease of costs, i.e. revenue synergies or cost synergies. Revenue synergies is generating
more sales by, for example, joining activities and reducing competition. Cost synergies result from saving costs by economies of scale, economies of scope and gaining knowledge from the other party. Cross-border M&A’s could create greater value than domestic ones because they offer more growth potentials in new markets, allow for more efficient distribution systems and possibly improve managerial deficiencies (Ahern et al., 2015).
Baker et al. (2004) conducted a survey and did research on the motives for firms to take part in M&A’s. They found that the greatest source of synergies is operating economies, resulting from greater economies of scale that improve productivity or cutting costs. Other sources of synergies were financial economies, resulting from lower transaction costs and tax gains, and increasing market power, due to reduction of competition (Baker et al., 2004). Next to these synergies, also negative synergies can arise. These negative synergies include the expenses related to performing M&A’s, such as costs of integration, legal costs, relocation cost and transaction costs.
2.3 Effect of cultural differences on cross-border M&A’s
In previous research different definitions for culture can be found. Culture is described as the way a human society acts and thinks. People in different countries have their own cultural characteristics; a different language, different religions and different norms and values (Ahern et al., 2012). Hofstede (1980) defines culture as a collective level of mental programming that is shared with some other people. It separates people into different groups or categories. Cultural characteristics influence the way people communicate and interact within a group or organization. National cultural values of people are a larger factor in life than is realized. These values are transferred from generation to generation and reinforced by social institutions (Olie, 1990).
Hofstede’s (1980) study is one of the most influential researches on cultural differences among countries. His study and the corresponding dimensions of culture, are widely used in the exiting literature on this subject. The dimensions of Hofstede’s (1980) research are groups of scores that separate the national cultures of countries from each other (Hofstede et al., 2010). The four dimensions of culture are power distance (PDI), individualism versus collectivism (IDV), masculinity versus femininity (MAS) and uncertainty avoidance (UAI). Power distance refers to the distribution of power in organizations and the extent to which is accepted and expected that the distribution of this power is unequal (Hofstede, 1980).
or, on the contrary, considers the role of the group to be more important. A low degree implies individualism and a high degree implies collectivism (Hofstede, 1980). Masculinity versus femininity focuses on the extent to which a society emphasizes achievement and nurtures. A masculine culture is characterized by preferences for achievement,
competitiveness, power, heroism and assertiveness. A feminine culture is about relationships, teamwork, caring, equality and quality of life. Uncertainty avoidance indicates the degree of the tolerance of people for uncertainty and ambiguity and how people deal with uncertainties of the future (Hofstede, 1980; Hofstede et al., 2010).
Two additional dimensions were adopted in more recent research of Hofstede (2010). The fifth cultural dimension is long-term versus short-term orientation (LTO). This dimension stands for the way a society maintains links with the past and at the same time deals with challenges of the future (Hofstede et al., 2010). The sixth dimension created was indulgence versus restraint (IVR). Hofstede et al. (2010) define indulgence as a tendency to satisfy basic and human desires, related to having fun and enjoying life. They define restraint as a belief that such satisfaction needs to be regulated and tamed by strict social norms. The dimensions long-term versus short-term orientation and indulgence versus restraint both help to clarify how national culture influences societies and help to separate the national cultures of countries (Hofstede et al., 2010).
Hofstede’s measure of cultural distance has been used in a lot of existing studies on this subject (e.g. Chakrabarti et al., 2009; Stahl and Voigt, 2008; Antia et al., 2007). The framework has been criticized on both empirical and theoretical grounds. The framework is based on one time and single company data. Also, the dimensions of the matrix are derived from a post-analysis factor structure (Raveh et al., 1996). However, in the end, the matrix has been largely validated and provides for a reasonable representation of national culture for this thesis and for the purpose of future studies (Raveh et al., 1996). The values of each dimension of each country are relative, since the different societies are compared to each other.
Nevertheless, the relative values are proven to be stable over the last decades (Hofstede et al., 2010).
Previous research has shown that there is an effect of cultural differences on cross-border M&A performance. Lack of cultural fit is argued to be an important factor of the frequent M&A failures (Bauer & Matzler, 2014). Cultural differences between the two companies of the M&A are mentioned in a lot of previous studies. However, research on this subject is
limited and has delivered contradictory outcomes. Both positive and negative effects are proven.
Morosini et al. (1998) found empirical support in their research for the fact that cultural differences improve the performance of cross-border M&A’s. The cross-border M&A’s performing better were those in which the target and the acquiring firm were from cultural distant countries. Also Chakrabarti et al. (2009) found a positive effect. Their
research showed that cultural differences affect cross-border M&A performance positively on the long run. Cross-border acquisitions perform better in the case of countries that culturally more differ. However, Ahern et al. (2015) found the opposite. They concluded that a greater cultural distance leads to a reduction of synergies, i.e. lower combined announcement returns in cross-border M&A. Lim et al. (2016) found this negative effect too.
Also, in the research of Conn et al. (2005) a negative relation between cultural differences and long-term performance is concluded.
This thesis will contribute to previous literature in broadening research on the subject of cultural differences in cross-border M&A’s. Cross-border M&A’s within European Union will be included in this research, in stead of domestic M&A’s within the U.S. which was examined in existing literature (Erel et al., 2012). This thesis will investigate the period of 2011-2017, the period after the financial crisis. Previous literature included data from before and during the crisis, so this thesis will also contribute with this.
3. Hypothesis
Differences in culture do have impact on merger and acquisition performances. (Stahl and Voigt, 2008). In the literature review is argued that cultural differences can have both a positive and negative effect on the performance of cross-border M&A’s. According to previous studies a greater cultural distance can cause the increase of integration costs. A larger cultural distance causes uncertainty which may lead to more information asymmetry. The assessment of knowledge will be difficult because of the big cultural and institutional distances (Lim et al, 2016). The bigger the cultural differences of the cultural dimensions of Hofstede et al. (2010) between the target and the acquirer, the lower abnormal returns in M&A deals on short and long term.
Based on previous research a negative effect is expected. Because of the differences in culture between the target and the acquiring firm, the abnormal returns of the acquirer will decrease. To get an answer to the research question ‘What is the short-term
effect of cultural differences on the abnormal return of the acquirer in cross-border mergers and acquisitions within the European Union?’ the following hypothesis will be described. Hypothesis: Cultural differences between target and acquirer have a negative short-term effect on abnormal returns of the acquirer in cross-border mergers and acquisitions within the
European Union.
4. Data and Methodology
This section will describe the data and methodology that is used to come to the results of this research. At first is described how data has been collected and what data sample is used. Then, the measure of cultural differences that is used in this research is given. Next, is
described how the dependent variable is calculated. Lastly, the regression model is given that is used to test if cultural differences have an effect on the abnormal returns of the acquirer’s stocks.
4.1 Data collection
To find data for this thesis the following data sources are used. I have used the database Zephyr to find information on M&A deals. Zephyr is a comprehensive database containing integrated, detailed company information on mergers and acquisitions, initial public offering, private equity and venture capital deals and rumors (Bureau van Dijk information). I have used the database DataStream to obtain the returns on the stock of each acquiring firm and the returns on the stock of the market indexes of the countries of the acquiring firms that are used as benchmarks. To define cultural differences between the two countries involved in the M&A deals, I have used the six dimension matrix of Hofstede et al. (2010).
4.2 Data sample
The sample used for this research includes data of completed merger and acquisition deals during the period of 01/01/2011 until 31/12/2017. This data is obtained from the Zephyr database and has the following criteria; (i) the deal type is a merger or an acquisition, (ii) the deals are completed, (iii) the deals are cross-border deals with the European Union, (iv) the acquirer is a listed company, (v) the acquirer owns between 51% and 100% of the targets shares after the transaction and (vi) the transaction value of the M&A deals is at least 100 million euros or bigger. These criteria generate a sample of 186 merger and acquisition deals.
M&A deals with incomplete data were excluded from the sample. Also, deals that did not meet the criteria were excluded. So, deals without available stock prices of the acquirer around announcement date, deals involving countries outside European Union and domestic deals are removed from the data sample. Eventually, the sample size of this research contains 159 cross-border M&A deals.
Table 1: Cross-border M&A deals between 2011-2017 within the European Union.
Acquiring Country Number of deals Target Country Number of deals
United Kingdom 35 The Netherlands 29
France 34 United Kingdom 21
Germany 22 Spain 19
Sweden 15 Italy 12
Spain 14 Germany 11
Ireland 8 France 10
Poland 7 Sweden 9
The Netherlands 6 Poland 6
Finland 5 Belgium 5 Italy 4 Austria 5 Belgium 4 Portugal 5 Austria 2 Lithuania 4 Denmark 2 Finland 3 Portugal 1 Denmark 3 Luxembourg 2 Cyprus 2 Czech Republic 2 Ireland 2 Bulgaria 2 Latvia 1 Greece 1 Estonia 1 Croatia 1 Romania 1 Slovenia 1 Hungary 1
4.3 Measure of cultural differences
Cultural differences between the target’s and the acquirer’s home countries may have an effect on the performance and success of cross-border mergers and acquisitions. To measure these cultural differences between the two countries of the cross-border deals, the six
dimension matrix of national culture (Hofstede, 1980; Hofstede et al., 2010) is used. This matrix is obtained from Hofstede’s website.
The six dimensions of the Hofstede matrix are the following: -‐ Individualism versus collectivism (IDV)
-‐ Uncertainty avoidance (UAI), -‐ Power distance (PDI),
-‐ Masculinity versus femininity (MAS),
-‐ Long-term orientation versus short-term orientation (LTO) -‐ Indulgence versus restraint (IVR)
For every M&A deal the values of these six dimensions of the home countries of the target and the acquirer are taken and the differences between the two are calculated. Based on the paper of Kogut and Singh (1988) the following formula is used to find these cultural differences between the acquirer and the target in each of the six dimensions. Kogut and Singh created an index to define the cultural differences between the countries of the target and acquirer: 𝐶𝐷#$ = { 𝐼(#− 𝐼($ * /𝑉(} 6 / (01
Where 𝐶𝐷23 is the cultural distance between the country of the target 𝑖 and the country of the acquirer 𝑗 (𝑖 ≠ 𝑗). 𝐼(# stands for the index for the 𝑑<= cultural dimension of target country 𝑖
and 𝐼>3stands for the index for the 𝑑<= cultural dimension of acquirer country 𝑗. 𝑉
>stands for
the variance of the index of the 𝑑<= dimension (Kogut and Singh, 1988).
Because in this thesis, each dimension is tested separately in the regression, this formula is adjusted. Instead of summing up the six different dimensions and dividing the formula by six, the adjusted version of the formula is used:
4.4 Dependent variable
In order to find the short-term effect of cultural differences on the abnormal return of the acquirer, I have used an event study. The short-term effect is measured using the
announcement returns of the acquiring companies. The event period contains the days before and after the announcement date and the two event windows used are [-5, 5] and [-1, 1].
The returns of the acquiring companies are compared to the returns on the market, the abnormal return. This is the dependent variable of the regressions. The abnormal returns of company 𝑖 (𝐴𝑅#) are defined as the return (𝑅#) minus a benchmark or normal return (𝑁𝑅#).
𝐴𝑅𝑖𝑡 = 𝑅𝑖𝑡− 𝑁𝑅𝑖𝑡
The time index t stands for event time, i.e. the number of periods (days, months) from the event (De Jong, 2007).The abnormal returns are found using stock exchange data from DataStream of the acquiring firms and the market indexes of their countries, as mentioned earlier.
To calculate the expected returns of the stock prices, the market adjusted return model is used as a benchmark,
𝑁𝑅𝑖𝑡 = 𝑅𝑚𝑡
where 𝑅𝑚𝑡 stands for the return on a market index (De Jong, 2007).
This expected return is subtracted from the actual returns of the acquirers for the two event windows to find the abnormal returns. From the previous steps the cumulative abnormal returns of each acquiring firm can be calculated by summing up the abnormal returns within the event windows.
𝐶𝐴𝑅# = 𝐴𝑅#D
D*
D0D1
Where 𝐶𝐴𝑅# stands for the cumulative abnormal returns over an event window [𝑡1, 𝑡2]. 𝐴𝑅#
denotes the abnormal returns over an event window [𝑡1, 𝑡2] (De Jong, 2007). 4.5 The model
When the 𝐶𝐴𝑅#, the dependent variable, has been calculated for all the companies, I perform a cross-sectional regression to test if the cultural differences have a positive or negative effect on the abnormal returns of the acquirer’s stocks.
𝐶𝐴𝑅# = 𝛽K+ 𝛽1𝐼𝐷𝑉# + 𝛽*𝑈𝐴𝐼#+ 𝛽N𝑃𝐷𝐼# + 𝛽P𝑀𝐴𝑆# + 𝛽S𝐿𝑇𝑂# + 𝛽/𝐼𝑉𝑅#
+ 𝛽W𝐿𝑛 𝐷𝑒𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 # + 𝑌𝑒𝑎𝑟 𝐹𝑖𝑥𝑒𝑑 𝐸𝑓𝑓𝑒𝑐𝑡𝑠 + 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝐹𝑖𝑥𝑒𝑑 𝐸𝑓𝑓𝑒𝑐𝑡𝑠 + 𝜀#
The model includes the control variable deal value, year fixed effects and country fixed effects. Deal value consists of the value that is paid by the acquiring company to the target company to complete the transaction. Deal characteristics are known to influence the future performances of M&A’s (Chakrabarti et al., 2009). For this control variable the natural logarithm is used, 𝐿𝑛(𝐷𝑒𝑎𝑙 𝑉𝑎𝑙𝑢𝑒). The data on the deal values is gained from the database Zephyr. Year fixed effects control for economic shocks, such as the financial crisis, that might influence M&A’s. Country fixed effects control for unobserved country factors and
systematic differences across countries.
The regression is done for the two points in time, one day before and after the announcement date and five days before and after the announcement date.
5. Results
In this section, the results from the regressions will be given. At first the summary statistics of the cumulative abnormal returns and the cultural difference variables will be presented. Next, the results of the regressions of the 𝐶𝐴𝑅𝑠 of the acquirers on the cultural differences will be presented.
5.1 Summary statistics
In table 1 of the appendix the summary statistics of the cumulative abnormal return (𝐶𝐴𝑅) of the acquirers around the M&A announcement date for the two event windows are shown. To calculate the expected returns and to find the abnormal returns of the stock prices, the market adjusted return model is used. The event windows around the announcement dates are [-5, 5] and [-1, 1]. The means of the 𝐶𝐴𝑅𝑠 in both event windows are low, because of the negative minimal value. Nevertheless, both means are still positive, which indicates that the majority of the M&A’s did profit from the deal. Table 1 also shows positive and significant 𝐶𝐴𝑅𝑠 for both the event windows. This is found by completing a t-test for both the event windows, which results in significant outcomes. For the event window [-5, 5], a 10% significance level and for event window [-1, 1] a 1% significance level is found. So, the announcement of the M&A’s has a positive effect on the returns of the acquiring companies.
Table 2 of the appendix shows the summary statistics of the cultural differences per dimension of the Hofstede matrix. The cultural differences per dimension between target and acquirer of each M&A deal are calculated using the adjusted version of the formula of Kogut and Singh (1988). Cultural differences in cross-border M&A deals are likely to impact the success of mergers and acquisitions, as mentioned earlier.
5.2 Results of the regressions
Table 3 of the appendix shows the results of the OLS regressions of the abnormal returns of the acquiring companies on the six dimensions of cultural differences of the Hofstede matrix and deal value (𝐿𝑛(𝐷𝑒𝑎𝑙 𝑉𝑎𝑙𝑢𝑒)), for the cross-border M&A deals within the European Union. Both regressions examine the performance of the stocks of the acquirers, the days around the M&A announcement date for the event windows [-5, 5] and [-1, 1]. The
regressions include the cultural differences per dimension. Each dimension has been put in the regression separately, so the effect of each one can be measured. The cultural differences are measured using the adjusted version of the formula of Kogut and Singh (1988). Both
regressions also include the control variable deal value, year fixed effects and country fixed effects.
For the first regression of 𝐶𝐴𝑅[-5, 5] a positive effect is found for the variable masculinity versus femininity (MAS) with a significance level of 10%. An 1% increase in masculinity versus femininity will increase the cumulative abnormal returns with 0.0109%. The variable has a positive influence on the stock performance of the acquirer in the cross-border M&A deals. This result is consistent with the findings of Morosini et al. (1998) and Chakrabarti et al. (2009), who found that cultural differences improve the performance of cross-border M&A’s. The bigger the cultural distance between the country of the target and that of the acquirer, the better the performance of the cross-border M&A’s (Morosini et al., 1998). For the other cultural variables, individualism versus collectivism (IDV), uncertainty avoidance (UAI), power distance (PDI), long-term orientation versus short-term orientation (LTO) and indulgence versus restraint (IVR), no significant effect is found. This means that these variables have no influence on the stock performance of acquiring companies in cross-border M&A deals within the European Union. This result is inconsistent with the findings of Morosini et al. (1998) and Chakrabarti et al. (2009), who found a positive effect. The results are also inconsistent with the findings of Ahern et al. (2015), Conn et al. (2005) and Lim et al. (2016), who found that a greater cultural distance in cross-border M&A deals has a negative influence on the stock performance of both the acquiring and the target company. Cultural
differences might lead to uncertainty and information asymmetry which causes more risk (Lim et al., 2016).
For the second regression of 𝐶𝐴𝑅[-1, 1] also a positive effect is found for the variable masculinity versus femininity (MAS) with a significance level of 5%. An 1% increase in masculinity versus femininity will increase the cumulative abnormal returns with 0.0091%. For the other cultural variables in the model no significant effect is found.
Based on previous researches, the hypothesis states that cultural differences between the target and the acquirer will have a negative short-term effect on the abnormal returns of the acquirer in cross-border mergers and acquisitions within the European Union. The results found for both the regressions are inconsistent with this hypothesis.
6. Robustness check
In this section, I will check for robustness to ensure that my results are not caused by the chosen the dependent variable and the way it is used in this research. Robustness checks will be performed to test if the unidentifiedeffects of cultural differences still hold when the dependent variable is specified in a different way. So an alternative specification of the dependent variable is used to perform new regressions. Instead of using the cumulative abnormal return (𝐶𝐴𝑅) of the days before and after the event as a whole, the dependent variable consists of the 𝐶𝐴𝑅 of the days after the event minus the 𝐶𝐴𝑅 of the days before the event. The dependent variable therefore reflects the difference between the return of the acquirer before and after the M&A announcement date. The regressions are performed for the 𝐶𝐴𝑅 one day after minus the 𝐶𝐴𝑅 one day before the announcement date (𝐶𝐴𝑅[1]-𝐶𝐴𝑅[-1]) and for the 𝐶𝐴𝑅 five days after minus the 𝐶𝐴𝑅 five days before the announcement date (𝐶𝐴𝑅[1;5]-𝐶𝐴𝑅[-5;-1]). Table 5 presents the results of the regressions. For all the cultural variables in both regressions, individualism versus collectivism, uncertainty avoidance, power distance, masculinity versus femininity, long-term orientation versus short-term orientation and indulgence versus restraint, no significant effect is found. This means that these variables have no influence on the difference between the returns of the acquirer before and after the M&A announcement date. From these results can be concluded that cultural differences have no effect on the difference between the returns of acquiring companies before and after the announcement date in cross-border M&A deals within the European Union. These results are consistent with the results that are found in the earlier regressions, except from the variable masculinity versus femininity, which showed a positive significant effect in the earlier
regressions. It can be concluded that the relation between cultural differences and the
abnormal returns of the acquirers of the cross-border M&A deals within the European Union is robust to this alternative way of specifying the dependent variable.
7. Conclusion
In this thesis I have investigated the effect of cultural differences between the target and acquiring firm on the abnormal returns of the acquirer in cross-border mergers and
acquisitions. This research has contributed to previous research in broadening research on cross-border M&A’s, especially on the effect of cultural differences. As far I am aware, I am the first to examine the effect of cultural differences on M&A’s for the period 2011-2017 in the European Union.
I have used a sample consisting of 159 completed cross-border M&A deals between the period of 2011 until 2017 within the European Union. For this sample, I have tested if cultural differences have an effect on the abnormal returns of the acquiring companies, by performing two OLS regressions for the event windows around the M&A announcement date, [-5, 5] and [-1, 1]. The following results are found by performing these regressions. For individualism versus collectivism, uncertainty avoidance, power distance, long-term
orientation versus short-term orientation and indulgence versus restraint no significant effect is found. For cultural differences in terms of masculinity versus femininity a positive and significant effect is found. Based on this result, it can be concluded that within the European Union, only the difference between the target and acquirer with respect to masculinity versus femininity has influence on the abnormal returns of the acquirer. These findings are contrary to the hypothesis that cultural differences have a negative effect on the abnormal returns. It seems that the cultural differences within the European Union have little to no effect on the performance of M&A's.
This research may suffer from some limitations. The sample in this study consists of 159 deals, which is a relatively small sample compared to previous research. A bigger sample might result in different outcomes in which a positive or negative effect is found. The region studied in this thesis is the European Union. It is possible that the cultural differences within the countries in the European Union are too small to be able to affect the abnormal returns of the acquirer. Future research on the effect of cultural differences therefore should investigate different countries from all over the world, to find if this is actually the case. Investigating these different countries, could make it possible to find a difference between the effect of
cultural differences within the EU and around the world. Also, the time frame that is
investigated, contains the period from 2011 until 2017. To better study the effect of cultural differences over time, this time frame could be enlarged in future research. In addition, the number of independent variables could be expanded. Additional variables as country variables and deal characteristics can be added. Country variables such as language and religion might improve the model. Also, additional deal characteristics can be added to improve the model. Deal characteristics are known to influence the performances of M&A’s (Chakrabarti et al., 2009).
Another possible limitation is that the location of the acquirer’s headquarters may be only partially informative about the culture in which the company is active. The acquirer may have branches in other countries and possibly also in the country of the target. If this is the case, the measure of cultural differences that is used may give an overestimation.
Furthermore, a possible limitation is that the decision to acquire another company is
endogenous. It is possible that the acquirer already takes cultural differences into account and only takes over the target if the added value is sufficiently large to eliminate the negative effects of cultural differences. This research does not control for this this effect.
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Appendix
Table 2: Summary statistics for the cumulative abnormal return (CAR) of the two event windows around the M&A announcement date, [-5, 5] and [-1, 1]. The market adjusted return model is used as a benchmark, to calculate the expected returns and to find the abnormal returns of the stock prices.
Variable CAR[-5, 5] CAR[-1, 1]
Obs. 159 159 Mean (%) 1.304 1.326 Minimum (%) -23.315 -17.508 Maximum (%) 20.303 21.095 Std. Deviation 0.088 0.0519 T-statistic 1.865* 3.219***
***Significant at the 1% level; **Significant at the 5% level; *Significant at the 10% level. Table 3: Summary statistics of the cultural differences between the target and the acquirer. The differences are found using the six cultural dimensions of Hofstede et al. (2010). The summary statistics present the cultural differences per dimension; individualism versus collectivism (IDV), uncertainty avoidance (UAI), power distance (PDI), masculinity versus femininity (MAS), long-term orientation versus short-term orientation (LTO) and indulgence versus restraint (IVR). Every cultural difference is calculated using the adjusted version of the formula of Kogut and Singh (1988).
Variables Obs. Mean Std. Dev. Minimum Maximum
IDV 157 1.009 1.339 0.000 5.180 UAI 157 0.994 1.116 0.000 5.555 PDI 157 0.982 1.335 0.000 8.515 MAS 157 1.011 1.202 0.000 4.561 LTO 157 0.983 1.315 0.000 7.698 IVR 159 1.013 1.395 0.002 8.585
Table 4: OLS regressions, with the cumulative abnormal return (CAR) of the event windows [-5, 5] and [-1, 1] around the M&A announcement date as dependent variable. The six dimensions of Hofstede et al. (2010) as independent variables. Every cultural difference is calculated using the adjusted version of the formula of Kogut and Singh (1988). Both
regressions include a control variable for deal value. Also year fixed effects and country fixed effects are included in both regressions.
(1) (2)|
Variables CAR[-5, 5] CAR[-1, 1]
IDV 0.0020 (0.0060) -0.0006 (0.0034) UAI 0.0059 (0.0080) 0.0051 (0.0046) PDI 0.0093 (0.0060) 0.0042 (0.0035) MAS 0.0105* (0.0061) 0.0082** (0.0035) LTO -0.0068 (0.0055) -0.0042 (0.0032) IVR 0.0009 (0.0053) -0.0032 (0.0030) Ln(Deal Value) -0.0026 (0.0064) -0.0056 (0.0036) Constant 0.0480 (0.1290) 0.1159 (0.0741) Observations 159 159 R-squared 0.0466 0.0934
County Fixed Effects Yes Yes
Year Fixed Effects Yes Yes
Table 5: Robustness check with alternative dependent variables, CAR[1]-CAR[-1] and CAR[1, 5]-CAR[-5;-1]. Both regressions include the six dimensions of the matrix of Hofstede et al. (2010), the control variable deal value, year fixed effects and country fixed effects.
(1) (2)|
Variables CAR[1]-CAR[-1] CAR[1, 5]-CAR[-5;-1]
IDV -0.0027 (0.0025) 0.0034 (0.0059) UAI -0.0005 (0.0033) -0.0009 (0.0079) PDI 0.0034 (0.0025) 0.0078 (0.0060) MAS 0.0009 (0.0025) 0.0073 (0.0061) LTO 0.0021 (0.0023) 0.0019 (0.0054) IVR 0.0029 (0.0022) 0.0027 (0.0052) Ln(Deal Value) -0.0012 (0.0026) 0.0054 (0.0063) Constant 0.0206 (0.0529) -0.1315 (0.1279) Observations 159 159 R-squared 0.0473 0.0262
County Fixed Effects Yes Yes
Year Fixed Effects Yes Yes
