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Country Governance and Changes in Acquirers Operational
Performance in Cross Border Mergers and Acquisitions:
Evidence from Emerging Markets
University of GroningenStudent number: S3048535
Name: Madalena Sanfins Villa
Study Programme: MSc IFM
Supervisor: Dr. Gonenc;
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Abstract
The purpose of this thesis is to analyze the impact of country governance, and differences between target and bidder countries level of governance, on changes in bidders’ operational performance. Accordingly, bidder and target countries level of governance is compared in order to test a potential impact in changes in bidders’ operational performance in cross border M&A’s. Operational performance is measured as the ratio between Cash Flows and Assets one year prior and one year after the announcement date. Accordingly, a sample of 33 emerging markets consisting of 435 cross border mergers and acquisitions over the time period 2002-2013 was used to answer the following research question: Do differences between bidder and target
countries level of governance influence bidder’s changes in operational performance in cross-border M&A’s when the bidder comes from an emerging market? Finally, I find no evidence between country governance standing alone and
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Table of Contents
Introduction……….4
Literature Review……….7
Corporate Governance………...7
Firm level Governance………...8
Effects of firm level Governance in emerging markets……….9
Country Factors effects in Corporate Governance………11
Cross-Border Mergers and Acquisitions………12
Motives for Cross Border M&A’s……….13
Corporate Governance and M&A’s………...14
Effects of country governance in firm performance………….16
Corporate Governance in Emerging Markets………19
Hypotheses Development………21
Data and Methodology……….23
Variables……….26
Event Study……….27
Results………...29
Limitations and Future Research………...36
Conclusions………38
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Introduction
OECD Corporate Governance (CG) principles are strongly used by country’s institutions and companies, and not only by OECD countries. These principles were revised in 2004 in order to better face corporate challenges (Zhong & Kong, 2009). Recently, many researchers have been giving an increasing amount of attention to CG. CG is a set of rules and mechanisms provide the essential means to ensure shareholders receive the returns of their investments. Accordingly, CG is a set of rules that manage the relationship between shareholders, stakeholders and the company itself. Furthermore, a strong relationship between all the firm’s agents, which means a good use of these rules, highly contributes for financial stability and sustainable growth (Jesover & Kirkpatrick, 2005). However, such set of rules is quite a new concept for some countries, especially for emerging economies. Moreover, CG strongly differs between regions, countries and companies within the same country. Accordingly, these differences in corporate governance at a country and firm level can, in fact, affect some of the firm’s operations.
According to, Cheung et. al (2001) good use of corporate governance principles is expected to influence the performance of a merger and/or acquisition. In addition to corporate governance the level country governance is expected to be of high importance for companies from emerging economies, since these regions are known for their poor governance at both firm and country level. In addition, previous scandals raised the question whether firms are correctly governed. As a response many firms have changed their corporate governance rules and practices. However, improving corporate governance structures implies some costs for shareholders. The fact that firms are willing to increase costs in order to improve their corporate governance structure shows a potential relationship between better corporate governance and high firm value (Chhaochharia & Laeven, 2009). Moreover, corporate governance and its mechanisms, have been linked to firm performance. Accordingly, previous studies suggest positive relationship between corporate governance mechanisms and firm operational performance (Zabri et al, 2016).
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bidders’ operational performance. Accordingly, bidder and target countries level of governance is compared in order to test a potential impact in changes in bidders’ operational performance in cross border M&A’s. Operational performance is measured as the ratio between Cash Flows and Assets one year prior and one year after the announcement date. Further four relationships between the level of bidder and target country governance are analyzed: Low-Low, High-High, Low-High, and High-Low. The high or low level of country governance is determined according the median value of country governance. Therefore, this thesis aims to answer the following question: Do
differences between bidder and target countries level of governance influence bidder’s changes in operational performance in cross-border M&A’s when the bidder comes from an emerging market? To answer this question a sample of 33
emerging markets consisting of 435 cross border mergers and acquisitions over the time period 2002-2013 will be used.
The next section of this thesis consists in literature review where related literature will be discussed. Accordingly, firm and country effects in corporate governance will be discuss in the following section. In fact, firms within the same country have different corporate governance systems – more or less developed - can be of importance for the firm valuation of bidders in cross border M&As. One question that could arise in this case is if between better country governance and high firm valuation in cross border M&As go in the same direction. In order to answer this question it is important to study corporate governance not only at a firm level but also at a country level, since it is known country factors influence the internal corporate systems.
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Literature Review:
This section aims at discuss previous literature and findings related to the impact of corporate governance in acquiring firm’s operational performance in emerging markets.
Corporate Governance:
Following the financial crisis in several developing countries, corporate governance has become an issue of great importance. Furthermore, past accounting scandals in multinational companies in developed countries show evidence that even companies in such developed and industrialized countries can be strongly affected by the consequences of bad corporate governance. Previous research concludes that bad corporate governance has an impact in the cost of capital, and performance. Accordingly, an increasing number of companies have been investing in the development of corporate governance rules and principles (Wu, 2005).
Corporate governance is a set of rules that manage the relationship between shareholders, stakeholders and the company itself. Furthermore, a strong relationship between all the firm’s agents, which means a good use of these rules, highly contributes for financial stability and sustainable growth (Jesover & Kirkpatrick, 2005).
Nowadays, codes of best practices regarding corporate governance processes have been adopted by companies. Accordingly, strategic processes, shareholder practices, and corporate failures are drawing the attention to the decision-making board. Moreover, the need to adapt such practices is related to the direct relationship that exists between good corporate governance and shareholder returns (Heracleous, 2001). As consequence, the role of corporate governance has been becoming of great importance, with a strong impact on company’s decision-making process, regarding several operations. However, corporate governance is not only a set of rules and principles, but also, nowadays, this concept, is seen as a policy. In several countries, such as the US and Brazil, governments have strengthen laws and the influence of formal institutions on corporate governance (Morey et al., 2009).
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practices in order to ensure great level of corporate transparency. In addition, some costs will fall on controlling shareholders due to a reduction of private benefits from the firm for increasing minority shareholders’ protection (Chhaochharia & Laeven, 2009).
For this purpose the need to study and develop corporate governance practices strongly appeared, especially in Asian countries due to the financial crisis (in some way caused by inefficiency in corporate governance) in 1997 (Claessens & Fan, 2002).
Moreover, corporate governance is of great importance for external investors, since, good corporate principles make the firm easy to account by shareholders and external investors. Finally, these “best practices” regarding corporate governance make the decision-making process easier (Cheung & Tan, 2011).
Firm-level corporate governance
Several corporate scandals in the past few years increased the amount of attention given to corporate governance at a firm level. These scandals, accordingly, created a need for high level corporate governance within firms. Governance at a firm level provides the necessary means to ensure the minority shareholders receive the returns on their investments. However, adopting such means or mechanisms within the firm imply some costs, which means firm level corporate governance is an investment, and several factors can influence the degree of investment a firm is willing to make in its governance system (Aggarwal et al. 2009).
High level of corporate governance is usually linked to better performance and valuation. Moreover, firms in emerging economies strongly rely in external funds to finance their growth. It appears that, as more as a firm wants to expand the higher will be the willingness to invest in corporate governance within the firm (Braga-Alves & Morey, 2012). Furthermore, some articles raise the question if better corporate governance within firms in emerging markets, since these countries are known for weak legal systems, actually contribute for a high firm valuation and better relationships with external investors. Morey et al. (2009) find there is a direct relationship between the level of governance at a firm level and firm valuation.
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governance influence firm valuation, and consequently bidders operating performance when two firms merge. In order to answer this question, it is necessary to discuss which factors affect the level of governance within a firm from an emerging economy. As mentioned before, Braga-Alves & Morey (2009) suggest that as more as a firm wants to expand the more it will be willing to invest in corporate governance. Finally, the following section will discuss the factors that affect corporate governance in emerging markets.
Factors affecting corporate governance in emerging markets:
Firm level corporate governance differs across countries and within countries. Controlling shareholder play a major role in the determination of the level of internal governance. In most of the cases it is expected that the controlling shareholder will act out of self interest, i.e, it will choose the level of internal governance that will maximize its returns rather than the returns of minority shareholders. It appears that the power given to the controlling shareholder partly depends on the country’s characteristics, as well as on the importance given by the firm to corporate governance. Accordingly, if a firm is willing to improve its internal governance, the controlling shareholder would see his private benefits reduced. In addition for firms that have a strong need for external funds, such as firms from emerging economies, improving their governance level would increase the likelihood of being successful in international operations – M&A’s – (Aggarwal et. al, 2009). Previous research suggests that well developed governance structures is a way to attract investors in order to easily access to external funds that could potentially have an impact in firm valuation (Chhaochharia & Leaven, 2009). Moreover, corporate governance and its mechanisms, such as board size and board independence, have been linked to firm performance. Accordingly, previous studies suggest positive relationship between corporate governance mechanisms and firm operational performance (Zabri et al, 2016).
Country factors cannot be ignored when it comes to firm level corporate governance. In some cases, the ability of a firm to manage the level of internal governance strongly depends on the country characteristics.
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Previous literature focused on the impact of the legal system, as a main country factor, in corporate governance at a firm level. Many articles found that laws to protect investors differ across countries (Klapper & Love, 2003).
Regarding, low shareholder protection in the target country this factor is expected to be connected with high agency problems. High agency problems in the target country decrease the value of the target firm, which is expected to impact positively changes in bidders’ operational performance. Moreover, previous literature finds that country governance can be a substitute of investor protection in cross border M&A’s (John et al. 2010). Accordingly, it is expected that country governance will have the same effects as investor protection on bidders’ changes in operational performance.
Klapper & Love (2003) also purposed some ways in which a firm can improve its investor protection. According to those authors, investor protection can be improved by increasing disclosure, adopting control mechanisms to manage controlling shareholders activities, and independent boards. Investing in such internal mechanisms is up to each firm. Therefore, it can be expected a firm will improve its investor protection, and hence, its level of corporate governance if it engages in operations with other firms that require high level of investor protection and internal governance.
Firms in emerging markets are expanding national and internationally. The number of cross-border M&A’s by emerging markets’ companies has been increasing in the last years. Recent literature finds that firms pursuing growth opportunities are more expected to invest in governance (Aggarwal et al., 2009).
Country factors effects in corporate governance
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financial development (Chhaochharia & Laeven, 2009). In the case of emerging markets where there are a great percentage of state-owned companies – e.g China – the principles and rules adopted by the companies are, in the first place, to meet the government’s interests. Recent literature finds that the level of internal governance is highly influence by the country’s investor protection and legal system (Klapper & Love, 2004).
Country characteristics can, indeed, have an impact on the firm’s internal corporate governance. Legal systems, national institutions and the influence of those institutions on the firm’s operations can influence their level of governance. For example, in China great percentage of firms is State-Owned. It is then expected that the government as a formal institution will have a great influence on the firm’s internal governance, in order to better serve the government’s interests. Institutions indeed have an influence of the country’s financial development and transaction costs. Accordingly, strongly developed institutions will contribute for a high financial development and low costs, which in the end affect the credibility of a firm’s governance and its willingness to meet minority shareholders’ interests. Therefore, weak institutions lead to a low economic development, making the task of finding the right individuals to perform functions essential for a better internal governance more difficult (Aggarwal et al., 2009). The level of legal protection given to investors it is also an important country factor affecting the effects of cross border M&A’s. It appears that, according to previous literature, the level of shareholder protection in the target country affects the returns to the acquirer. Legal protection given to minority shareholders in the target country is indeed correlated with the country’s legal system and with enforced laws regarding investor protection (John et al 2010). Moreover, the relationship between shareholder protection and corporate governance and its effects in firm valuation is only studied at a firm level.
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In fact previous literature suggests that the ability firms have to exploit country differences at a macroeconomic level can add value to the bidder (Bany-Ariffin et al. 2016).
Besides differences in institutions, such as legal institutions and the government, the level of economic development can be expected to influence the country governance. Thus, this thesis will use as a dependent variable the GDP per capita of the acquiring country. In doing so, it will be analyzed if this macroeconomic variable significantly affects bidders operational performance.
Cross-Border Mergers and Acquisitions
The volume and value of cross-border acquisitions have been increasing in the last decades. There are several reasons why firms engage in this type of operations. Elimination of geographic distances, economic distances, value creation, and institutional-related differences across countries are some of the reasons that lead two firms to merge. Accordingly, the elimination of these distances/differences and the merger of two different governance standards can, indeed, result in a value increase for the acquirer firm (Erel et al. 2012). Despite the high volume of cross-border M&A’s by developed economies, this thesis will focus on the increasing number of M&A’s by emerging economies.
Motives for cross-border M&A’s by emerging economies
Emerging economies face a rapid growth – has never seen before - , however they face some challenges when going abroad as a consequence of being latecomers. Furthermore, these economies are abundant in low labor costs.
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processes, market power, gain shareholder value,etc… Moreover, companies learn how to better internationalize engaging in foreign acquisitions (Nadolska & Barkema, 2007)
By acquiring international firms, emerging economies can have access to more efficient distribution channels and open doors in the international markets for domestic products. Furthermore, emerging economies became international acquires for asset seeking reasons. According to previous literature, emerging economies firms’ first aim at acquiring international companies is strategic resource acquisition (Nicholson, et al. 2013). In accordance to this strategic resource seeking is the increasing number of cross-border M&A’s by emerging markets multinational since 1990’s.
According to the World Investment Report 2016, outbound cross-border M&A’s by emerging market companies have increased from 245 in 2010 to 348 in the last year (UNCTAD, 2016). Although resource seeking might be the main reason for emerging markets companies to engage in cross-border M&As, according to the type of foreign acquisition by a emerging market multinational company can be split into the following categories (Rui & Yip, 2008)
1. Transnational oriented firms: focus on global competition, however, the gain of market power in the domestic country is still a goal.
2. Compensate competitive disadvantages by using the skills/knowledge and assets of the acquired company;
3.Domestically oriented firms: focus on competing in the domestic market with other multinational companies, using strategies acquired;
4.Trade-oriented: regarding these firms, revenues are mainly from trading. In this case, the acquisition of foreign assets it is a clever strategy to expand the trading channels, and skills;
5. Niche market
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differences when expanding abroad. It appears that the intensity of those challenges can somehow offset the benefits and value creation of M&A’s (Aybar & Ficici, 2009). One of the challenges firms are expected to face is the different level of corporate governance systems at both country and firm level. Corporate governance systems are expected to impact such an operation, and therefore the value creation for the firm. Country Governance and M&A’s:
Differences in country governance are expected to influence the decision-making process and the success of some of the operations taken by the firm.
Regarding M&A’s, differences in country governance can affect the performance of this operation. This thesis expects to answer the question whether differences in country governance affect changes in bidders’ operational performance in cross border M&A’s by emerging markets economies.
Accordingly, acquirers’ country governance is expected to affect the premium required by the target shareholders. In addition, M&A’s imply that gains and/or losses from such operations will be shared between both bidder and target shareholder. This expectation is consistent with suggestions from Starks & Wei (2013) study, which analyzes the impact of country’s governance in the takeover premium when the bidders are US companies. Accordingly, a potential result of cross border M&A’s is the change in the governance structure. Although this thesis will use Starks & Wei (2013) as a background paper, here the impact of country’s governance and firm characteristics from emerging market bidders - instead of US/developed countries - on bidder’s operational performance will be analyzed.
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governance is linked to poor equity markets and poor financial disclosures, which, indeed, affect the bidder’s decision in engaging in M&A’s (Du & Boateng, 2012).
Corporate governance at a firm level is positively correlated with the value of cash flows that come to minority shareholders. There are several reasons that explained the fact just mentioned. First, the private welfare of the controlling shareholder decreases. Second, a good level of internal governance increases the earnings from issuing equity, increasing the number of possible investments. Finally, with better internal governance the decision making process will take into account the maximization of shareholder’s wealth (Aggarwal et al., 2009).
Effects of country governance on firm performance:
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a major role, as a substitute of shareholder protection, in cross border M&As (John et al. 2010).
However, here the bidder is from an emerging market and rder M&A’s, which can influence the takeover premium payed by such firms due to a weak bargaining power relative to firms from developed economies (Narayan & Thenmozhi, 2014). Accordingly, it can be expected that such differences will have an impact on changes in bidder’s operational performance when the level of country governance of the bidder is similar to the target’s level.
Country Governance in Emerging Markets:
Country Governance has been proven as essential for a country’s sustainable growth and stability. It appears that a good level of governance reflects a good functioning of the capital markets.
Regarding emerging markets economies, previous studies suggest that despite the
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Hypotheses Development:
Some hypotheses will be tested to answer the question whether differences in country governance between bidder and target countries will affect changes in bidder’s operational performance in cross border M&A’s. Operating performance here is measure as the ratio of the acquirer’s Cash flows and total assets one year before and after the announcement date. After calculating the operational performance one year prior and one year after the acquisition it is possible to calculate the change in operational performance (-1,+1), accordingly.
For the purpose of this thesis all bidder firms will be from emerging markets countries and the target will be firms from all over the world. The central hypothesis consists in testing whether bidder’s country governance will impact positively changes in bidder’s operational performance. Moreover, the level of country governance for both bidder and target countries is determined according to median value for country governance. Therefore, the first and central hypothesis can be stated as follows:
H1: Bidder’s country governance has a positive impact on changes in bidder’s operating performance.
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a country with low country governance. The results in this case of low country governance between target and bidder are expected to be the same for public and private. A second hypothesis can be stated as follows:
H2: If both bidder and target are from a country will low governance changes in bidder’s operating performance will be positive.
According to the hypotheses stated above it will be tested for the overall sample the impact of low level of country governance between target and bidder on changes in bidders’ operational performance. For the purpose of this thesis target companies considered for are both public and private. As mentioned before in case of low level of shareholder protection, and therefore country governance the results for public and private firms are expected to be the same. However, when both bidder and target are from countries with high shareholder protection, and therefore high level of country governance, the impact of the relationship between bidder and target firms country governance on changes in operational performance it is expected to be different regarding the target listing status.
H3: If both bidder and target country have well developed governance systems changes in bidder’s operational performance will be negative.
In addition to the two relationships between bidder and target countries governance other two possible relationships will be analyzed. Accordingly, the impact on changes in bidder’s operational performance when bidder is from a country with low level of country governance and the target from a country with high level of governance will be analyzed first for the overall sample and later on with regard the target status. Starks & Wei (2013) suggest in their study that target shareholders will require a higher premium if bidder comes from a country with low governance relative to the target country. Therefore it is expected that such differences in country governance lead to negative change in bidder’s operational performance will be negative. This last expectation allows me to state a fourth hypothesis.
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Finally, a fourth relationship between the levels of bidder and target country governance will be analyzed. Despite all bidder firms are from emerging markets there are also some target firms from emerging markets than can actually have a lower level of country governance than the acquiring firm. Therefore, it is of interest to test the impact on changes in bidder’s operational performance when bidder comes from a country with high level of governance relative to the target country. Firms overall in countries with low level of governance are expected to be less valued. Therefore it is expected that a lower premium will be required by target shareholders and changes in bidder’s operational performance will be positive. Regarding target status, public firms these are suppose to have lower value in low shareholder protection countries, i.e low level of governance countries. The relationship between level of shareholder protection and private targets value show no significant results. However, it is known those firms have low value relative to public firms (John et. al, 2010).
H5: If bidder comes from a high governance country relative to target country changes in bidder’s operational performance will be positive.
Previous findings that suggest market reactions on the announcement date lead to changes in both abnormal stock returns and operational performance (Edwards et al, 2016). Accordingly, the potential change on operational performance will be tested with regard to the differences in country governance between bidder and target.
Finally, according to Starks & Wei (2013) differences in the level of country governance bidder’s and target countries are also assumed to be a sufficient statistic to answer the question whether changes in operational performance will be positive or negative, accordingly. For example, John et al (2010) find that corporate governance and the level of shareholder protection can be substitutes in the effects on the returns to acquirers, and consequently on acquirers operational performance measured as the ratio of Cash flows and assets.
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Data and methodology
In order to analyze if the country’s corporate governance has impact in bidder’s operational performance in cross border M&A’s a full sample consists of 435 cross border mergers and acquisitions over the time period 2002-2013. For the purpose of this thesis, operational performance, OP, will be measured as follows:
OPi = Cash Flowsit / Assetsit
Where:
Cash Flowsit: sum of net income and depreciation of the firm i at the time t
Assetsit: total assets of the firm i at the time t
The data regarding M&A deals and deals’ characteristics is collected from Orbis database, which is software with a range of information regarding M&A’s.
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total number of cross border M&A’s of the sample countries over the time period 2002-2013. Country 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Brazil 1 - 1 1 2 2 5 - 3 - - 2 Chile - - - 2 - 1 1 1 2 1 2 - China 1 1 2 1 - 1 3 3 - 2 1 2 Colombia - - - - 1 - - - - 1 - - Egypt - - 1 2 - - - - - - - - Hungary 1 1 1 1 1 - - - 1 - - - India 3 7 17 11 19 13 11 2 4 6 3 - Indonesia - - - - 1 - - - 1 - - - Israel 3 - 7 2 6 7 3 - 5 3 3 4 Malaysia 2 10 4 9 6 7 6 12 10 8 5 6 Mexico 1 2 1 2 1 - 1 - 1 4 - 3 Peru - 1 - - - 1 - - Philippines - 1 2 2 1 1 - - - - Poland - 1 - 1 - 4 2 2 - 1 1 1 Russia - 3 2 - 4 2 4 3 - 2 - 2 Slovenia - - - - 1 1 1 - - - - - South Africa 2 4 4 - 2 3 4 1 - - 1 3 South Korea - 3 5 3 1 1 1 - 2 5 3 7 Taiwan - 4 1 2 1 3 2 - 3 1 2 - Thailand - 2 - 1 - - - 1 1 1 - - Turkey - 1 - - 1 - 1 - 1 3 1 1 Total Acquisitions:435
Table 1: Number of M&A’s per country and year
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Both bidder and target firms will be from a sample of 33 emerging market countries. The firms contained in the sample must meet the following criteria:
1. Bidder is a public firm and target is either public or private; bidder is from an emerging economy presented in the country sample and the target from all over the world.
2. Deal value and announcement date must be known: announcement date is critical to answer the question whether or not differences in corporate governance affect firm value in cross border M&As by emerging markets; data regarding deal value and announcement date are available on Orbis database; deals with no announcement date are not taken into account for this research.
3. Only transactions acquiring a minimum of 10% and final acquiring stake will be consider
4. Deal types: Acquisitions and Mergers – all other types of deals – joint ventures, Greenfield, etc… By excluding this type of deals the problem of endogeinety can be reduced.
Regarding the acquirer stake only M&A’s where the acquirer has at least 10% of the target stake will be considered. This restriction was imposed because according to the World Bank if the acquired stake is less than 10% the operation is not considered as an M&A.
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regression model will allow me to analyze the effect of differences in the level of country governance between bidder and target on changes in bidder’s operational performance. Finally, as control variables bidder’s country and firm characteristics will be used. Accordingly, casual relationship between betas movements caused my movements in the dependent variable will be stated in multiple linear regressions.
Variables
According to John et al (2010) findings cross border M&A activities are expected to be much more intense when the target is private. Therefore a dummy variable for the target listing status will be included in the regression model. As dependent variable, changes in operational performance one year prior and one year after the announcement data, t=-1, t=+1, being t=0 the announcement date. Further as independent variables for the regression model some country variables will be included.
As country variables, the country governance variable included in the model includes all the items covered by the World Bank considered as governance indicators. In addition, bidder’s stock market capitalization, and country GDP per capita will be included in the regression model as the main independent variables. Acquiring firm characteristics will be included in the regression model as control variables in order to increase the power of the model. Further a dummy variable regarding the listing status of the target firm will also be included in the regression model. Accordingly, the impact of country variables on changes in bidder’s operational performance will be analyzed, while controlling for acquiring firm variables. Finally, industry effects are not considered for the purposed of this thesis, and therefore, no industry variables will be included.
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Table 2: Variables Definitions
Country Variables
Country Governance Bidder Including all six the items from World Bank consider as country governance indicators in order to measure the level of bidder’s country governance over the time period 2000-2013.
Country Governance Target Including all six the items from World Bank consider as country governance indicators in order to measure the level of target’s country governance over the time period 2000-2013.
GDP per capita growth Logarithm of acquirer’s country GDP per capita growth in US$ on the announcement date. Data collected from the World Bank MarketSize Acquirer’s country market relative size. Measured as the natural
logarithm of the acquirer stock market capitalization.
Deal and Acquirer Firm Characteristics/Control Variables:
Cash Asset ratio Acquirer ratio between cash holdings in US$ and assets used to measure firm’s liquidity on the announcement date. Data derived from Thomson Reuteurs Datastream.
Leverage Logarithm of the ratio between acquirer’s total debt and assets on the announcement date. Derived by Thomson Reuters Datastream Acquirer Relative size Calculated as the natural logarithm of acquirer market capitalization.
Data derived from Thomson Reuters Datastream
Bidder_Low Dummy Variable that takes the value of 1 if bidder country governance value is lower the median value and zero otherwise. Bidder_high Dummy Variable that takes the value of 1 if bidder country
governance value is equal or higher than the median value and zero otherwise.
Target_Low Dummy Variable that takes the value of 1 if target country governance value is lower than the median value and zero otherwise. Target_High Dummy Variable that takes the value of 1 if target country
governance value is equal or higher than the median value and zero otherwise.
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Results:
Table 3 provides the summary statics with mean, median and standard deviation of the Operational Performance of the acquiring firm over days -1 to +1, where day 0 is the announcement day. For the full sample the mean, median, and standard deviation of acquiring firm Operational Performance (-1,+1) is -0.144, -0.013, and 2.66, respectively. For the overall sample changes in bidder’s operational performance it is statistically different from zero at a 10% level. Therefore, emerging markets acquirers benefit from M&A’s.
In addition to the Operational performance (-1,+1) the main independent variables – Country governance, Logarithm of GDP per capita growth, and market size - and the respective summary statistics are reported on this table. For the overall sample the variable country governance has a mean, median and standard deviation of 0.19, 0.31, and 0.001, respectively. Accordingly, this variable is not statistically significant different from zero. Regarding the GDP growth per capita this country variable has a mean, median and standard deviation of 0.30, 0.04, and 0.08, respectively. GDP growth
per capita is also not significantly different from zero for the overall sample. For the
target country, the target governance variable shows a mean, median and standard deviation of 0.853, 1.270, and 0.847, respectively. The summary statistics of the country governance variables is of interest because the level of bidder and target counties governance will be defined as high or low according to median. Finally, the last country variable added to regression model, the relative market size measured as the natural logarithm of the bidder’s stock market capitalization on the announcement date, has a mean, median and standard deviation of 1.86, 1.86, and 0.01, respectively. This independent variable is also not significantly different from zero for the full sample.
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Table 4 below shows the results of the OLS regression for changes in bidder’s operational performance for the overall sample. Three models are shown in this table, Model (1), (2), and (3). For model (1) differences between the level of bidder and target countries governance are not tested. In this first regression only the main independent variables were included. Accordingly, without any control variables all the coefficients are not statistically different from zero at any of the significance levels. The first and central hypothesis of this thesis states that bidders’ country governance has a positive impact on changes in bidders’ operational performance. From the results achieved with regression model below, bidders’ country governance is not statistically different from zero, and therefore, according to this regression model and for the overall sample without any control variables, the first hypothesis is not supported. Finally, F-statistic is 0.507 and also not statistically different from zero.
The second model shows the results of OLS regressions on country governance measures for the overall sample and with all control variables included. The control
Mean Median Standard Deviation
Operational Performance (-1,+1) -0.144 -0.013 2.66
Country Governance Bidder 0.192 0.305 0.501
Country Governance Target 0.853 1.270 0.847
LOG_GDP per capita growth in US$ 0.001 0.0005 0.003
Market size 1.864 1.865 0.253
Acquirer Size 5.864 5.907 0.999
LOG_Leverage 0.402 0.247 1.03
Cash Asset Ratio 0.137 0.099 0.118
Total Observations: 435
This table shows the descriptive statistics of the operational performance and independent variables, as used in this thesis, for the overall sample of 33 emerging market firms, acquiring public and private firms from all over the world over the time period 2002-2013. Operational Performance(-1,+1) is the 3 days operational performance of the
acquiring firm, where day 0 is the announcement date. Country Governance Bidder is the independent variable used to analyze the level of bidder’s country governance and its potential impact on changes in bidders’ operational performance. This variable contains the 6 items of The World Bank governance indicators. Country Governance Target is the country governance of the target country. GDP per capita growth denotes for the logarithm of the GDP growth of the acquiring firm on the announcement date in US$. Market size is the natural logarithm of acquirer’s stock market capitalization on the announcement date. Regarding control variables, acquirer relative size is the logarithm of acquiring firm’s market capitalization on the announcement date. Leverage is the logarithm of the ratio between acquiring firm total debt and assets on the announcement date. The last control variable is the cash asset ratio which is the ratio between cash holding cash holdings and assets on the announcement date.
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variables are included in order to increase the power of the model. However, including control variables in the regression model decreased the number of observations – from 164 observations to 137 observations, after adjustments – which can influence the results. Accordingly, in the second OLS regression model for the overall sample all the estimate coefficients are not statistically different from zero. Regarding, bidder and target countries variables the p-value and standard deviation of these country governance variable increased –variables more insignificant. F-statistic is 0.574 and is also not statistically different from zero. Finally regarding the first hypothesis, this is also not supported in this second regression model.
A third regression model, Model (3), on the table 4 below shows the results for the overall sample with all control variables included in the regression model and with the interaction between bidder and target countries governance variables. Interacting these two terms allows one to understand whether there is a relationship between this two variables and changes in bidder’s operational performance in cross border M&A’s. Accordingly, with the interaction term the effect of bidder’s country governance on changes in operational performance is different for different levels of target country governance. Moreover, with this interaction the effect of bidder’s country governance on changes in operational performance is not explained by the estimated coefficient of this variable standing alone but instead by the estimated coefficient of the interacting term and values of target country governance.
31 Variables Model (1) Model (2) Model (3) Intercept -0.099 (0.089) 0.056 (0.11) 0.055 (0.110)
Corporate Governance Bidder
0.006 (0.027) 0.016 (0.023) 0.019 (0.027)
Corporate Governance Target 0.017
(0.015) 0.017 (0.012) 0.018 (0.027) Corporate_Governance_Bidder*Corporate_Governance_Target -0.005 (0.024)
LOG_GDPper capita Growth 2.817
(5.515) 3.298 (4.741) 3.138 (4.816) Market Size 0.025 (0.047) -0.239 (0.047) -0.024 (0.041) Control Variables Acquirer Size -0.011 (0.010) -0.011 (0.010) LOG_Leverage -0.004 (0.009) 0.004 (0.009)
Cash assets ratio -0.004
(0.094) -0.003 (0.095) N 164 137 137 Adj R2 -0.012 -0.022 -0.029 F-Statistic 0.507 0.574 0.505
This table provides the results of bidders’ changes in operational performance(-1,+1) for the overall sample in three different models. Changes in Operational performance are measured as the ratio between cash flows and assets one year prior and one year after the announcement date. Changes in operational performance are computed 3 days surrounding the announcement date t=-1, t=+1, where t=0 is the announcement date. Model 1 shows the OLS results for the overall sample with no control variables. Country Governance bidder and Country Governance target are the level of country governance of bidder and target respectively. Model 2 shows the OLS results for the overall sample including control variables – bidder firm characteristics. Finally, Model 3 included the interacting term between bidder and target countries governance: Country_Governance_Bidder*Country_Governance_Target. Regarding the control variables, Cash Flows are measured as the sum between net income and total assets. Country governance is the level of country governance and contains the six items of the World Bank governance indicators. Country governance Target is the level of target country governance. Log GDP per capita growth is the logarithm of growth per capita of this macroeconomic variable in the acquiring firm country on the announcement date. Market size is the natural logarithm of the acquiring firm country’s market capitalization. Regarding control variables, acquirer relative size the natural logarithm of acquiring firm market capitalization on the announcement date. Shareholder equity is the ratio between common equity and assets on the announcement date. Leverage stands for the logarithm of the ratio between acquirer’s total debt and assets on the announcement date. Finally, Cash asset ratio is the ratio between acquiring firm cash holding and assets, measuring the degree of liquidity of *Statistically significant at the 0.1 level; **Statistically significant at the 0.05 level; ***Statistically significant at the 0.01 level.
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The next table below, table 5 , shows the OLS regression models results on country governance measures. The level – high or low - of both bidder and target country governance is measured according to the median obtained on the summary statistics table. Countries with country governance values lower (higher) than the median value are consider as countries with low (high) level of country governance. This regressions model on the level of country governance will be used to test the hypotheses regarding differences on bidder and target countries governance and their impact on changes in bidder’s operational performance. Four dummy variables were created for the level of bidder and target country governance. In each regression model two dummy variables, for the level of bidder and target countries governance, were included and also the interacting term of the two dummies. Accordingly, column 2, Low-Low, shows the OLS results when both bidder and target country have low level of country governance: bidder country governance below 0.305 and target country governance below 1.27. In this regression the dummy variable Bidder_Low and Target_Low were included standing alone and also the interacting term. These dummy variables take the value of 1 if the level of country governance of bidder and target is lower than the median value and zero otherwise. For this regression model all the estimate coefficients are not statistically different from zero, and therefore none of them explains changes in bidder’s operational performance. Further the interacting term between low level of bidder country governance and low level of target country governance, according to the median value, this is also not statistically different from zero, and therefore, do not explain changes in bidders operational performance. Regarding hypothesis 2 this one states that when target and bidder both come from a country with low level of governance changes in bidder’s operational performance are positive. However, according to the OLS results this hypothesis is not supported because the coefficients for both target and bidder countries governance are not statistically different from zero, and therefore not explaining changes in bidder’s operational performance in cross border M&A’s. Finally, F-statistic is 0.264 and also not statistically different from zero.
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bidder’s operational performance. For this purpose, in this regression model two dummy variables for the high level of country governance for both bidder and target were included in the regression model. Accordingly, Bidder_High and Target_high are dummy variables that take the value of 1 if the country governance value is higher than the median value and zero otherwise. For this relationship between target and bidder country governance none of the estimate coefficients is statistically different from zero. Regarding country governance, the high level of country governance of both target and bidder standing alone do not explain changes in bidders’ operational performance in cross-border M&A’s. Further, the interacting term between the two dummy variables was included in order to test the impact of differences between bidder and target countries governance on changes in bidders’ operational performance. According to the OLS results the interacting term is not statistically different from zero, and therefore do not explain changes in bidders’ operational performance in cross border M&A’s. All the other independent variables are not statistically different from zero.
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Li
Variables Low-Low (2) High-High (3) Low-High (4) High-Low (5) Intercept 0.087 (0.115) 0.0677 (0.112) 0.077 (0.111) 0.072 (0.118) Bidder_Low -0.016 (0.038) -0.009 (0.032) Bidder_High 0.009 (0.032) 0.016 (0.038) Target_Low -0.011 (0.024) -0.004 (0.041) Target_High 0.004 (0.041) 0.011 (0.024) Bidder_Low*Target_Low 0.007 (0.047) Bidder_High*Target_High 0.007 (0.047) Bidder_Low*Target_High -0.007 (0.047) Bidder_High_*Target_Low -0.007 (0.047) LOG_GDPper capita Growth 2.287 (4.727) 2.287 (4.727) 2.287 (4.727) 2.287 (4.727) Market Size -0.023 (0.043) -0.023 (0.043) -0.023 (0.043) -0.023 (0.043) Control Variables Acquirer Size -0.011 (0.010) -0.011 (0.010) -0.011 (0.010) -0.011 (0.010) LOG_Leverage 0.002 (0.009) 0.002 (0.009) -0.002 (0.009) -0.002 (0.009)Cash assets ratio -9.77E
-05 (0.096) -9.77E -05 (0.096) -9.77E-05 (0.096) -9.77E -05 (0.096) N 137 137 137 137 Adj R2 -0.045 -0.045 -0.045 -0.045 F-Statistic 0.264 0.264 0.264 0.264
This table provides the results of bidders’ changes in operational performance(-1,+1) for the 4 possible relationships between the level of bidder and target countries governance. Changes in Operational performance are measured as the ratio between cash flows and assets one year prior and one year after the announcement date. Changes in operational performance are computed 3 days surrounding the announcement date t=-1, t=+1, where t=0 is the announcement date. Cash Flows are measured as the sum between net income and total assets. Log GDP per capita growth is the logarithm of growth per capita of this macroeconomic variable in the acquiring firm country on the announcement date. Market size is the natural logarithm of the acquiring firm country’s market capitalization. For the level of country governance of bidder and target countries, 4 dummy variables were created: bidder_low, bidder_high, target_low, and target high. Regarding control variables, acquirer relative size the natural logarithm of acquiring firm market capitalization on the announcement date.Leverage stands for the logarithm of the ratio between acquirer’s total debt and assets on the announcement date. Finally, Cash asset ratio is the ratio between acquiring firm cash holding and assets, measuring the degree of liquidity of the acquiring firm on the announcement date. Number of observations and adjusted R2 are reported on the bottom of the table. *Statistically significant at the 0.1 level; **Statistically significant at the 0.05 level; ***Statistically significant at the 0.01 level.
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mitations and Future Research
This section deals with the limitations of this thesis. The biggest limitation is attributed to limited data availability. Limited data availability and number of observations for bidders and target countries country governance could have actually led to such insignificant results. Moreover, corporate governance at a firm level and differences between bidder and target firms governance on changes in bidder’s operational performance were not analyzed due to very limited number of observations on this firm governance measure for bidder firms. Further due to limited data regarding firm governance no firm characteristics were compared. Only bidder country and firm characteristics were used for the purpose of this thesis. According to the background paper Starks & Wei (2013) target size comparing to the acquiring firm size can lead to important results regarding the impact of corporate governance in returns to acquirers, and therefore in operational performance. Also method of payment and industry effects were not taken into account for the analysis. Another suggestion for future research would be test the impact of industry and deal method of payment when bidders are from emerging markets.
As mentioned before the bidders operational performance can be affected by other country and firm factors rather than the level of corporate governance. These other factors could actually compensate the lack of good country governance in the acquirers’ operational performance. According to Starks & Wei (2013) the country factors that could potentially affect the acquiring firm operational performance, measured as the ratio between firm cash flows and assets, are investor scrutiny and investor recognition. However, in this thesis it is assumed that factors that affect abnormal returns to bidders also affect operational performance, which can be seen as limitation. For future research it can be suggested that one try to investigate if such factors affecting abnormal returns to bidders actually affect in the operational performance in the same way.
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future research the sample of emerging countries could be enlarged in order to test the effects for both target status.
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Conclusions
The focus of this research was to analyze weather differences country governance between bidder and target countries affects changes in bidder’s operational performance. For this purpose changes in operational performance one year prior and one year after the announcement date were computed. Moreover, acquiring firm operational performance is calculated as the ration between Cash flows and assets. Accordingly, cash flows are calculated as the difference between net income and depreciation. Acquiring firms were from a sample of 33 emerging markets while target firms are from all over the world. Regarding bidder and target status bidder firms were listed firms while targets were both public and private. Further, the list of M&A’s from the sample of 33 emerging countries was collected from Orbis Database over the time period of 2002-2013 for a total of 435 M&A’s.
The primary goal of this thesis is to answer the following research question: Do
differences between bidder and target countries level of governance influence bidder’s changes in operational performance in cross-border M&A’s when the bidder comes from an emerging market? In order to answer the research question
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A third regression model was performed on country governance relationships. In order to answer the research question, four possible relationships between target and bidder countries level of country governance were analyzed. For this purpose four dummy variables were created for the level of bidder and target countries governance. Further, these dummy variables were included in the regression model standing alone and also the interacting term between them. The interacting term allowed me to test the hypothesis regarding the differences between bidder and target countries level of governance and their impact on changes in bidders’ operational performance. However, for all the four possible relationships any of the estimate coefficients show level of significance, and therefore, none of the hypotheses is supported.
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