Master Thesis
The effect of country and firm-level governance on cross-border
mergers and acquisitions: private vs. public target
June 9, 2017
Student name: Xiaotong Peng Student number: S3016722 Study Programme: MSc IFM Supervisor: Dr. Halit Gonenc Co-assessor: Mr. Marnix Reijenga
Abstract: The objective of this thesis is to investigate the how a bidder’s firm-level governance
affects their return during the days surrounding an M&A announcement. This study pays particular attention to whether the target’s country-level governance and listing status can affect the relationship between the bidder’s firm-level governance and bidder’s return. Specifically, the author aims to establish how the combined effect of the bidder’s firm governance, the target’s country governance, and listing status influence the bidder’s return. The sample comprises a total of 515 cross-border M&A deals, consisting of 401 private deals from 2009 to 2013 and 114 public deals from 2002 to 2013.The results do not find a significant relationship between the bidder’s firm-level governance and return, target’s country-governance, and listing status does not affect this relationship. However, the results emphasize that the combined effect of the bidder’s firm-level governance, the target’s country-level governance, and listing status has a significant effect on the bidder’s return.
Keywords: Cross-border M&A, Corporate Governance, Shareholder Protection, Bidder’s
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Acknowledgement
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1.Introduction
In recent years, an increasing number of cross-border mergers and acquisitions(M&As) have been conducted by firms to implement their internationalization strategy. Accordingly, cross-border M&As can be viewed as an indication of a substantial change in a firm’s corporate strategy (Tao et al., 2017). According to Deloitte (2015), over $4 trillion of deals have been made through M&As during the year. Specifically, cross-border is a significant feature in M&A deals, and accounting for more than $1 trillion. Previous studies have demonstrated that cross-border M&As increase the bidder’s value, since firms can better exploit comparative advantage and resources in international markets (Li et al., 2016; Tao et al., 2017; Ning et al.,2014; Francis et al.,2008). Accompanied by waves of cross-border M&A, corporate governance seems to have grown in importance, since high-quality governance can also help firms to better capture the benefits of synergy with M&A (Klapper and Love, 2004; Bris et al., 2008; Martynova and Renneboog, 2008;; Ellis et al., 2011; Xie et al.,2017).
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relationship is expected. This thesis also pays particular attention to whether the target’s shareholder protection affects this relationship, and whether private and public targets affects this relationship differently. More specifically, this thesis aims to establish how the combined effect of the bidder’s firm level governance, the target’s shareholder protection, and listing status will affect the bidder’s gain. In line with the arguments of literature, this thesis also expects that the relationship between the bidder’s firm governance, the bidder’s return and the target’s country governance will be moderated by target’s listing status.
The thesis collects data from worldwide cross-border M&As. The time frame for the private target is from 2009 to 2013, and the public target is from 2002 to 2013. Furthermore, ordinary least square (OLS) regression estimation is applied to test the combined effect of interactions between the bidder’s firm governance, the target’s country corporate and the target’s listing status on bidder return.
The findings indicate that bidder’s firm-level governance does not significantly affect the bidder’s return, in contrast to the literature. Moreover, the target’s shareholder protection does not significantly moderate the relationship between bidder firm-level governance and bidder gain. Regarding the target’s listing status, the results demonstrate that the listing status of target firm does not moderate the impact of the bidder’s firm governance on the bidder return. Finally, the results of the interaction between bidder firm governance, target shareholder protection and target listing status reveal that, acquiring a private target can positively moderate the effect of bidder’s firm governance on bidder’s return when the target is located in high shareholder protection country. Specifically, those three factors can only affect bidder's return when they are combined. The possible explanation is that it is difficult for the bidder to obtain profit from a target with high shareholder protection. However, when acquiring a private target, the discount effect of private firm decreases the valuation of target firms, subsequently increasing the bidder return.
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existing studies about corporate governance and bidder’s gain. Finally, this thesis helps to solve a puzzle regarding the difference in target shareholder protection and bidder’s firm-level governance, and the impact of target listing status on bidder’s return. Based on this view, this thesis extends further than existing studies, and initiates a discussion about how the combined effect of firm-level governance, country-level governance and listing status affects bidder gain.
The remainder of this thesis is structured as follows. Section 2 presents the theoretical literature review for this study. Section 3 provides the hypotheses, and Section 4 describes the methodology and data. Section 5 presents the results of regression analysis. Section 6 concludes the thesis and discusses the managerial implications for relevant further research.
2.Literature review 2.1. Cross-border M&A
Prior literature provides ample evidence that M&A announcement creates value, since firms can exploit more comparative advantages and existing insider or outsider resources during the process of going abroad (Francis et al.,2008; Ning et al., 2014; Li et al., 2016; Tao et al., 2017). Aybar and Ficici (2009) explain that the valuation effect of M&A results from arbitrage through the international environment, capturing informational externalities and saving costs due to the scale in production. Therefore, cross-border M&A offers firms an expansion opportunity to achieve value-creation.
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2.2. Corporate governance
In General, corporate governance mainly deal with the mechanism that makes sure investor can get investment return, and high quality of corporate governance enable firms to get access to capital market and raise fund especially when the firms have the opportunity to growth (Doidge et al., 2007).Moreover, improvement of corporate governance in the cross-border M&As can positively affect firm-specific corporate governance, firm’s market value, and also increase cross-border M&A’s synergy effect (Bris et al., 2008; Martynova and Renneboog,2008; Klapper and Love, 2004; Xie et al.,2017; Bruno and Claessens,2010).
2.2.1. Firm-level corporate governance and bidder return
Firm-level corporate governance always aims to solve conflicts between managers and shareholders and to further decrease agency costs. In general, a higher firm-level of corporate governance improves a firm’s operating performance and its ability to organize excess resources, and can also decrease the cost of capital. There are several studies that find a positive relationship between firm corporate governance and firm valuation. (Klapper and Love, 2004; Chhaochharia and Grinstein, 2007; Von Koch et al., 2013; Dittmar and Smith, 2007; Ammann et al., 2011; Core et al., 2006). However, Core et al. (2006) additional suggest that weak governance can also improve firm performance by shielding managers from the consequences of the lower-tail outcome of a good project, thereby encouraging managers to engage in a less risk-averse manner. Moreover, the managers of firms with strong governance are encouraged to invest in areas in which they have specific expertise, thus increasing the risk of overinvestment. Meanwhile, firms with lower governance may provide managers with enough or less job security, which helps them to avoid overinvesting in specific projects. In line with most of the empirical evidence, this thesis expects the firm governance of bidder to have a positive effect on bidder return.
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performance than well-governed firms. This is because low-governance firms have lower labor productivity and higher capital expenditures, which eventually lead to the destruction of acquisition’s value. Some studies adopt antitakeover provisions(ATPs) as a proxy of firm corporate governance. Bebchuk et al. (2009) demonstrate that more ATPs indicate poorer corporate governance. This is challenging to the completion of M&A deals completion, since more ATPs slow down the takeover process and increase transaction costs. Furthermore, Masulis et al. (2007) point out that bidders with more ATPs will experience a negative return, because firms with more ATPs are less subject to the disciplinary power of the market’s corporate control, there is greater opportunity for the firms to indulge in empire-building acquisition which eventually results in the destruction of firm value. However, Chang et al.(2015) find that poorly governed bidders(with more ATPs) earn a higher return than well-governed firms, because poorer governance bidder can better take advantage of tunneling or other value-extracting activities.
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can also promote restructuring when faced with synergy challenges during the acquisition process. Kroll et.al (2008) further consider three agency factors, independent board membership, blockholder ownership and equity holding by outsider members, and conclude that board vigilance with more acquisition experience gains more return, since an experienced director can provide and guide strategic suggestions and decisions.
In summary, existing studies of firm corporate governance mainly adopt specific aspects or other proxies of corporate governance to investigate its influence on bidder return, and find mixed results. In order to fill the gap in the previous literature, this thesis adopts the single firm governance score and five components of firm corporate governance (functions of the board of directors, structure of the board of directors, compensation policy of the board of directors, company vision and strategy and shareholder rights) to test the relationship between firm governance and bidder’s gain. In line with most prior studies, this thesis expects a positive relationship between bidder’s corporate governance and bidder’s return.
2.2.2. Country-level corporate governance and bidder’s return
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voluntarily bootstrap to the stronger governance of the target and experiences an increase in its share price. Therefore, the bidder’s return is positive when the target has stronger corporate governance.
There are differing views about how differences in country governance (between the bidder and target) affect the bidder’s return. In general, shareholder protection is the focal concern of country-level governance. For instance, La Porta et al. (1998) initially focus on firm performance under different legal regimes. They find that a country with low protection may have substitute mechanisms of governance and present a high level of concentration of ownership. More specifically, countries with poor protection face a lower debt and equity market, while countries with stronger shareholder protection can better promote the economic growth.
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thus, leading to a decrease in bidder’s return. Bris et al. (2008) find contrasting results. They suggest that targets benefit from bidders with stronger shareholder protection, since target firms can better adopt governance practice. However, they find that there is no effect on the acquiring firm’s value if targets are from a country with lower corporate governance or poorer accounting standards.
In addition to those mentioned above, some existing studies also examine the relationship between firm-level governance and country-level governance (Klapper, Love,2004; Von Koch et al.,2013; Bruno and Claessens,2010; John et al.,2010). Klapper and Love (2004) and Von Koch et al. (2013) find that an improvement in country-level corporate governance can significantly increase the level of firm-level governance. More specifically, the relationship between firm-level governance and country-level governance can be complementary, which indicate that a high level of investor protection at the country level is accompanied by a high level of governance mechanisms at the firm level (Von Koch et al., 2013). Moreover, firm-level corporate governance mechanisms may substitute for the lower level of investor protection (John et al.,2010; Klapper and Love,2004), and firm-level corporate governance provision is more important in the low protection environment. Because the legal system is less useful in a high-quality governance system, in this case, firms are less dependent on the legal system to deal with governance problems. However, Bruno and Claessens (2010) state that country-level corporate governance has a negligible even negative, influence on firm-level corporate governance and firm value, and that country-level and firm-level corporate governance are neither complements nor substitutes in their study. In summary, it remains unclear how the interaction between firm governance and country governance affects the bidder’s return, and how the target country governance affects bidder’s return. This thesis aims to extend the current studies to exploring how country-level governance affects the relationship between firm-level governance and the bidder’s return.
2.3. Listing status of target firms
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overly intangible or geographically spread (Capron and Shen, 2007). Existing studies support the idea that the bidder earns a significantly higher return for acquiring private firms than for public firms (Conn et al., 2005; Bae et al., 2013; Jaffe et al., 2015; Aybar and Ficici, 2009; Capron and Shen, 2007;Chang, 1998; Fuller et al.,2002). The reasons for this notion can be explained in several ways. For instance, Conn et, al (2005) find that the bidder always underperforms in public acquisitions, but not in private acquisition deals. The main cause of this effect is that the decision-making processes of private acquisition are less exposed to the public, and bidders can easily end negotiations without loss of face. Moreover, the blockholders of private targets can better provide monitoring and exercise due diligence, which is generally in the stockholders’ interest. Furthermore, it is well known that private targets are liquidity-constrained, which leads to a lower sale price. Since private firms are illiquid and less active than public firms, they have a lesser ability to cash out, as well as fewer chances to require a higher premium from the bidder (Officer, 2007; Conn et al., 2005). The information provided by private targets is often limited, which increases the risk that the bidder cannot correctly evaluate the target firm value. However, this absence of information brings more chances for bidders to obtain potential benefits when exploiting the limited information of private targets (Capron and Shen, 2007).
Regarding public targets, the bidder can obtain benefits from the higher level of investment scrutiny or awareness of public firms. Thereby, the premium paid to the target is decreased and the bidder’s return is relatively increased (Starks and Wei, 2013). Moreover, the bidder will prefer a public target when acquiring small and young firms, according to Shen and Reuer (2005) who shed light on the benefits of public M&A deals. Essentially, acquiring public targets can reduce information asymmetry problems. The information revealed by public target firms is more credible, which can help firms to calibrate their bids and provides a liquid market for shares (Shen and Reuer, 2005).
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with a low level of governance and their agency problems are decreased through being acquired by high governance bidder, the public target requires less premium and the bidder gains more return. Although agency costs can be mitigated by the high level of insider ownership in public firms (John et al., 2010), the agency costs of public targets are significantly higher than the liquidity discount of private targets because of the relatively smaller size of private firms. Consequently, regarding public targets, bidder return decreases and the target value increases with the level of their investor protection. However, for private firms, bidder return remains positive and investor protection has no effect on bidder return or the target firm’s value.
In sum, existing studies propose differing views about the bidder’s return in terms of public and private targets, and there is no consistent conclusion about whether a private target or public target can bring more premium to the bidder. In line with most of literature, this thesis examines whether private and public targets affect the bidder’s return differently. Moreover, the aim is also to investigate whether a different target listing status affects the interaction between firm governance, country governance and bidder’s return.
3.Hypotheses
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Hypothesis 1: The acquiring firm’s firm-level corporate governance positively affects the bidder’s announcement returns.
The literature suggests that country-level corporate governance contributes to value creation. This is because the corporate governance provides monitoring and discipline devices, which makes it more difficult for insiders harder to acquire private benefits at the expense of shareholders, and ensures the value-maximizing goals of managers (Ellis et al., 2011; Bruno and Claessens, 2010). During a cross-border M&A, the improvement of a country’s corporate governance can significantly increase the synergy effect which benefits both the bidder and target firms. Moreover, if a target has stronger corporate governance than the bidder, the bidders prefers to voluntarily bootstrap to ensure better governance and experience the benefits (Martynova and Renneboog,2008). Since shareholder protection is the main concern of country-level corporate governance, mixed arguments exist about how a different level of shareholder protection of the target firm affects the bidder’s return. Some of the literature argues that the bidder’s return is negative when target firms are located in countries with stronger country corporate governance (Starks and Wei ,2013; Hagendorff et al.,2008; John et al.,2010). It is difficult for the bidder to benefits from a highly liquid and competitive target market, because the bidder needs to pay more premiums to compensate the target’s shareholders for lowering the whole level of governance, and. On the contrary, the bidder’s return is positive in the case of target firms with lower country governance, since a target with a less freely -operating market for corporate control, it is easier for the bidder to obtain profits from compensating the private benefits of control and information asymmetry. However, another argument is that the bidder’s return is negative when the bidder has high shareholder protection in acquiring a target with lower governance, because the bidder needs to compensate insiders for the increase of risk and loss of benefit control. In other words, the bidder’s return is positive when the target has high shareholder protection, since there is no need for the bidder to pay a premium to compensate insiders. Therefore, based on the findings of the current literature, a different country-level governance of the target can differently affect the bidder’s return.
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the target’s country-level governance can affect this relationship. Existing studies that examine the interaction between firm-level and country-level governance, and they find inconsistent results (Klapper and Love,2004; Von Koch et al.,2013; Bruno and Claessens,2010; John et al.,2010). Since no literature that is directly relevant to this focus can be found, this thesis aims to fill this gap. Therefore, it can be argued that the relationship between the bidder’s firm governance and the bidder’s return will be affected by the country-level governance of target firms. Thus, the second hypothesis is as follows:
Hypothesis 2: The relationship between the bidder’s firm-level governance and the bidder’s announcement return is affected by country-level governance.
Regarding the listing status of targets, some prior evidence suggests that the bidder earns a significantly greater return from acquiring a private firm than from acquiring a public firm (Chang, 1998; Fuller et al.,2002; Conn et al., 2005; Capron and Shen, 2007; Aybar and Ficici, 2009; Bae et al., 2013; Jaffe et al., 2015). Other literature also provides support for the idea that acquiring public target firms brings more premium to bidders (Starks and Wei, 2013; Shen and Reuer,2005). Thus, it can be stated that private and public targets differently affect the bidder’s return, but it is still unknown whether bidders obtain more benefits from acquiring private than public targets.
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environment is usually owned by a small number of individuals, who actively improve firm governance to complement the absence of country-level governance (Klapper and Love, 2004). Thus, private targets ask for high premiums, and the bidder’s return is decreased.
In line with the above arguments, this thesis argues that private and public targets will differently influence the relationship between the bidder’s firm-level governance and the bidder’s return. Moreover, this thesis also expects that the bidder’s return is negative for public targets and positive for private targets, when target is located in a country with high shareholder protection. Meanwhile, the bidder’s return is expected to be positive for a public target and negative for a private target when the target is in a country with low shareholder protection. Therefore, the relationship between the return of bidders having a different firm-level governance with the target’s country-level governance can be affected by the listing status of target firms. Accordingly, the hypotheses 3a and 3b are formulated as follows:
Hypothesis 3a: The relationship between the bidder’s firm-level governance and the bidder’s announcement return is different for private and public targets
Hypothesis 3b: The combined effect of the bidder’s firm-level governance and the target’s country-level governance on the bidder’s announcement return is affected by target’s listing status.
4.Data and methodology 4.1. Data collection
Since the number of M&A deals acquiring private targets is significantly more than those acquiring public targets, different time frames are used to select private and public target data. Private target data mainly focuses on the period of 2009 to 2013 while the public firm data is collected from 2002 to 2013. The sample is collected from Thomson Reuters and is intended to meet the following criteria:
(1) The M&A deals must be completed, and publicly announced. (2) Financial institutions are excluded.
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(4) The acquiring frim must be publicly traded with available market capitalization data that can be found in DataStream, and the target firm can be listed or unlisted.
(5) The acquiring firm must take less than 50% control of the target firm before M&A, and take more than 50% of target firm after M&A.
(6) The value of the M&A deal should be greater than one million USD. Several steps are applied to obtain the final sample：
1. Cross-border: The Thomson Reuters database includes 12,023 M&A deals from 2002 to 2013. In order to sort the available data, deals are classified into cross-border deals and domestic deals, there are 5277 cross-border deals. The remaining are domestic M&A deals that should be ignored.
2. Time frame and other criteria: All of the sample transactions should meet the criteria (completed transaction, the deal value of more than one million USD, exclusion of finance related industries and must hold less than 50% prior to the transaction and own more than 50% after the transaction). Moreover, since the number of M&A deals acquiring private targets is significantly larger than public targets, the different time frame is applied for the private and public target. Overall, there are 422 deals for private targets from 2009-2013 and 128 deals for the public target from 2002-2013.
3. Control variables: 550 transactions are matched with various data sources, such as DataStream, World Bank. Specifically, several control variables are applied, such as the method of payment, relative size, industry, attitude, GDP per capita, firm size, Tobin’s q, leverage, and internationalization. After removing some deals missing information from the control variables, 417 private deals and 124 public deals remain.
4. Bidder return: These observations are matched with the firm return and market returns, and deals with missed information are removed. The final sample is a total of 515 M&A deals, 401 acquiring a private target and 114 acquiring a public target.
4.2. Sample distribution
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targets. Furthermore, Table 2 reveals that bidders from Western European bidders account for 51.5% of all cross-border M&As. Moreover, bidders from Africa, Asia, Latin America, North America and Oceania account for 0.6%, 13.2%, 0.6%, 0.8%, 26.2% and 7.2%, respectively
Table 1. Sample distribution by year
Year All M&As Public-target M&As Private-target M&As
2002 1 1 0 2003 8 8 0 2004 7 7 0 2005 15 15 0 2006 12 12 0 2007 11 11 0 2008 11 11 0 2009 66 10 56 2010 115 14 101 2011 102 15 87 2012 98 8 90 2013 69 2 67 Total 515 114 401
Note: This table presents the sample distribution from year 2002-2013. Table 2. Sample distribution by bidder’s nation
Region All M&As Public-target M&As Private-target M&As Africa Asia Eastern Europe Latin America North America Oceania Western Europe Total 3 68 3 4 135 37 265 515 2 21 2 2 19 1 67 114 1 47 1 2 116 36 198 401
Note: This table presents the sample distribution by bidder’s nation, including eight major regions.
4.3. Methodology
4.3.1. Dependent variable
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market-adjusted abnormal return model (Brown and Warner, 1985; Gonenc et al.,2013). According to Gonenc et al. (2013), ARi, t refers to the market adjusted abnormal return of stock i at the time t, Ri,t refers to the return of firm’s stock i at time t, and Rm,t is the return on the local market index at time t. The formula for AR is as follows:
ARi, t = Ri, t – Rm, t (1) Detailed, five-day cumulative abnormal return(CARs) are adopted, and event day zero is the M&A deal announcement day. CAR (-2, +2) is used to find whether the bidder’s value changes during the five days. The formula of CAR is as follows:
𝐶𝐴𝑅𝑖𝑡 = ∑𝑡𝑡=1𝐴𝑅𝑖𝑡 (2)
4.3.2. Major independent variables
This thesis focuses on three independent variables: firm-level corporate governance, country-level corporate governance, and the listing status of target firms. First of all, two firm governance variables are employed in this analysis. A single corporate governance score (CGVSCORE) is applied to reflect the quality of a firm’s corporate governance. Moreover, firm-level corporate governance (firm CG) data is found from the ASSET4 Environment, Social and Governance (ESG) database in DataStream. There are five components of firm CG: (1) functions of the board of directors (CGBF); (2) structure of the board of directors (CGBS); (3) compensation policy of the board of directors (CGCP); (4) company vision and strategy (CGVS); and (5) shareholder rights (CGSR). Second, the main proxy of country-level corporate governance (country CG) is shareholder protection, and the revised anti-director-right index of the targeting country is collected from Djankov et al. (2008). Finally, in line with Starks and Wei (2013), the listing status set as a dummy variable which is equal to 1 if the target firm is private (PRIVATE), otherwise equal to 0 if acquiring a public target.
4.3.3. Control variables
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Country-level factor: GDP per capita is in USD for the bidder’s country (Ahern et al., 2015; Xie et al., 2017; Deng and Yang, 2015). Deng and Yang (2015) explain that GDP per capita can better represent the number of potential firms.
Deal-level factors: First, the method of payment (CASH) is applied as a control variable. Fuller et al. (2002), Chang (1998) and Masulis et al. (2007) suggest that bidders gain more when cash payment is offered by target firms compared to stock payment. Specifically, they predict that the method of payment has a positive effect on public targets but a negative effect on private targets. In line with the study of John et al. (2010), the method of payment is set as a dummy variable and equal to 1 if the offer is entirely paid in cash and 0 otherwise. Second, industry relatedness (IND) is also used. John et al. (2010) and Ahern et al. (2015) apply the same industry as a dummy variable which equals one if the bidder and target are in the same industry (i.e. they have the same three-digit SIC code), and equal to zero otherwise. John et al. (2010) suggest that industrial diversification has negative effects on the bidder’s return. Third, relative size (RLS) is the logged value of the deal value that relates to the bidder’s market capitalization (Starks and Wei, 2013), and it is suggested that the relative size is positively related to stock payment. Finally, according to Ahern et al. (2015), the attitude (ATT) of the offer is set as a dummy variable that equals to one if an M&A attitude is defined as friendly, and zero otherwise.
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relationship between bidder’s international experiences with bidder’s return.
4.3.4. Regression analysis
The core issue in this paper is to examine the relationship between firm-level governance and whether country-level governance and target listing status can moderate this relationship, in addition to the interactions between firm-level corporate governance, country-level corporate governance and target listing status on bidder’s return, as expressed in hypotheses 1, 2 and 3. Accordingly, OLS regression is applied to test these hypotheses, and the regression model is composed of the firm-level corporate governance, country-level corporate governance, listing status of target firms and several control variables. Therefore, the model is as follows:
CAR𝑖 = 𝛼 + 𝛽1𝐹𝑖𝑟𝑚𝐶𝐺𝑖+ 𝛽2𝑃𝑟𝑖𝑣𝑎𝑡𝑒𝐷𝑢𝑚𝑚𝑦𝑖+ 𝛽3𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐺𝑜𝑣𝑒𝑟𝑛𝑎𝑛𝑐𝑒𝑗+ 𝛽4𝐹𝑖𝑟𝑚𝐶𝐺𝑖∗
𝑃𝑟𝑖𝑣𝑎𝑡𝑒𝐷𝑢𝑚𝑚𝑦𝑖 + 𝛽5𝐹𝑖𝑟𝑚𝐶𝐺𝑖 ∗ 𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐺𝑜𝑣𝑒𝑟𝑛𝑎𝑛𝑐𝑒𝑖+ 𝛽6𝑃𝑟𝑖𝑣𝑎𝑡𝑒𝐷𝑢𝑚𝑚𝑦𝑖 ∗ 𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐺𝑜𝑣𝑒𝑟𝑛𝑎𝑛𝑐𝑒𝑖 + 𝛽7𝐹𝑖𝑟𝑚𝐶𝐺𝑖 ∗ 𝑃𝑟𝑖𝑣𝑎𝑡𝑒𝐷𝑢𝑚𝑚𝑦𝑖 ∗ 𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐺𝑜𝑣𝑒𝑟𝑛𝑎𝑛𝑐𝑒𝑖+
𝛽8𝐶𝐴𝑆𝐻𝑖+ 𝛽9𝑅𝐿𝑆𝑖 + 𝛽11𝐺𝐷𝑃𝑖 + 𝛽12𝑆𝐼𝑍𝐸𝑖+ 𝛽13𝑇𝑄𝑖+ 𝛽14𝐴𝑐𝑞_𝐺𝐷𝑃𝑖 + 𝛽15𝑇𝑎𝑟_𝐺𝐷𝑃𝑖+ 𝛽16𝐴𝑇𝑇𝑖 + 𝛽17𝐼𝑁𝐷𝑖 + 𝛽18𝐿𝐸𝑉𝑖 + 𝛽19𝐼𝑁𝑇𝑖+ 𝜖𝑖 (3)
Where i denotes the cross-border M&A deal and j denotes the nation of bidders.
Table 3. Measurement of control variables
Variable Symbol Measurement Source
Method of payment CASH Dummy equals to one if payment is made completely with cash, zero otherwise.
Thomson Reuters
Relative size RLS Ratio. Transaction value relates to the bidder’s market capitalization
Thomson Reuters and DataStream
Industry IND Dummy variable is equal to one if bidder and target are in the same industry (same three-digit SIC code), and
equal to zero otherwise
Thomson Reuters
Attitude ATT Dummy variable is equal to one if an M&A attitude is defined as friendly, and zero otherwise.
Thomson Reuters
GDP per capita GDP The GDP per capita in USD among the bidder’s country
World Bank
Firm size SIZE Uses natural logarithm of total assets of the acquirer one year prior to the deal announcement
DataStream
Tobin’s Q TQ Ratio, which is calculated by market capitalization to total assets of the acquirers
DataStream
Leverage LEV Ratio. Total debt divided by total assets. DataStream
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5.Empirical results and analysis 5.1. Descriptive statistics
Table 4 indicates the mean, median and standard deviation values of dependent variable CAR (-2, +2), the independent variables firm CG (firm-level governance), country CG (country-level governance), and listing status (private dummy), and a series of control variables. The first row reports the descriptive statistics of the CAR for five event days. The mean and median values of the bidder’s CAR are 0.91% and 0.7% respectively, and confirm that cross-border M&As on average bring a positive effect to the bidder’s return. In more detail, this table shows that the public target’s mean of CAR is 0.72%, while the private target’s mean CAR is 1.56%. The result indicates that the bidder’s return is higher for acquiring public targets than for private targets, this is consistent with the studies of Starks and Wei (2013) and Shen and Reuer (2005). The second row presents the average firm-level corporate governance score of 64.91. Regarding two individual samples, the bidder’s firm-level corporate governance for a private target (66.95) is higher than for a public target (57.72), which indicates that the firm governance of bidder is stronger for acquiring private targets than for public targets. Moreover, the third row reveals that, on average, the shareholder protection of the target country is 3.6. There is little difference between the mean values of private(3.571) and public (3.7149) targets. The fourth row is related to the listing status of target firms. 77.86% which are private, and 22.14% public.
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Table 4. Summarized statistics of variables used in the study
Panel A: descriptive statistics of variables
Variable All samples Private targets Public targets Private-Public difference
N Mean Median Std.Dev N Mean Median Std.Dev N Mean Median Std.Dev Mean Median
CAR (-2, +2) 515 0.0091*** 0.0070*** 0.0432 401 0.0072*** 0.0057*** 0.0419 114 0.0156*** 0.0117*** 0.0469 -0.0084* -0.006* Firm CG 515 64.9104 72.17 23.8869 401 66.9532 73.67 22.2838 114 57.7247 65.395 27.7619 9.2285*** 8.275*** Country CG 515 3.6029 3.5 1.0288 401 3.571 3.5 1.035 114 3.7149 3.5 1.0021 -0.1439 0 Private 515 0.7786 1 0.4156 Acq GDP 515 43645.22 44507.66 12758.24 401 45081.67 46523.3 12392.1 114 38592.45 41049.2 12795.7 6489.22*** 5474.1*** Tar GDP 515 35881.82 41788.04 20657.77 401 39151.43 46569.7 19515.2 114 24380.83 21556.8 20533.4 14770.6*** 25013.9*** LEV INT 515 515 0.2315 0.5943 0.2135 0.6316 0.1394 0.2761 401 401 0.2276 0.6115 0.2091 0.6413 0.1413 0.27 114 114 0.2450 0.5340 0.2367 0.5201 0.1322 0.2897 -0.0174 0.0775** -0.0276 0.1212** SIZE 515 22.437 22.242 1.5609 401 22.1682 22.0458 1.5249 114 23.3842 23.541 1.3 -1.216*** -1.4952*** TQ 515 1.7856 1.57 0.8342 401 1.7838 1.54 0.8567 114 1.7917 1.62 0.7533 -0.0079 0.08 ATT 515 0.9456 1 0.227 401 0.975 1 0.1561 114 0.8421 1 0.3662 0.1329*** 0** IND 515 0.4602 0 0.4989 401 0.4613 0 0.4991 114 0.4561 0 0.5002 0.0052 0 CASH 515 0.3981 0 0.49 401 0.369 0 0.4831 114 0.5 0.5 0.5022 -0.1310** -0.5** RLS 515 0.0433 0.0113 0.1148 401 0.034 0.0103 0.0761 114 0.076 0.0152 0.1952 -0.0042*** -0.0049**
22 Panel B: correlation matrix
Variables CAR (-2,
+2) Firm CG CountryCG Private Acq GDP Tar GDP CASH RLS IND ATT INT LEV TQ SIZE
CAR (-2, +2) 1 Firm CG -0.0247 1 Country CG -0.0338 -0.0019 1 Private -0.0804 0.1606 -0.0581 1 Acq GDP -0.0462 0.2379 -0.0203 0.1274 1 Tar GDP -0.0287 0.0311 -0.0640 0.3099 0.0249 1 CASH 0.0041 0.0382 0.0459 -0.1110 -0.0145 0.0441 1 RLS 0.2008 -0.0260 -0.0771 -0.1515 -0.0427 0.0887 0.0091 1 Industry 0.0209 -0.0402 -0.1360 0.0043 0.0094 -0.0517 0.0212 -0.0286 1 ATT 0.0208 0.1145 -0.0301 0.2434 0.0761 0.1014 0.0375 0.0163 0.0152 1 INT 0.0976 0.1667 -0.1452 0.1167 0.1132 0.0610 0.0374 0.0722 0.0128 0.1244 1 LEV -0.0025 -0.0745 0.0233 -0.0517 -0.0936 -0.0989 -0.0416 -0.0256 0.0270 -0.0584 -0.1061 1 TQ -0.0926 0.0727 0.0292 -0.0039 0.0669 -0.0383 -0.0044 -0.0638 0.0312 -0.0065 -0.0575 0.0053 1 SIZE -0.0996 0.0042 0.0152 -0.3237 -0.0266 -0.1756 0.0330 -0.1125 -0.1804 -0.0885 -0.0635 0.2544 0.0251 1
Note: This table provides the correlation matrix between all variables. Acq GDP and tar GDP in this table are shown in US$ amount. Lev is total debt divided by market value
23
of private targets is 1.7838 (1.54), while the mean (median) when acquiring a public target is 1.7917 (1.62), respectively. Furthermore, 94.56% of the samples are found to be friendly M&A deals. 97.5% of deals in the private group are friendly, and 84.21% of deals are friendly in the public group. The Table also indicates that M&A deals in the same industry account for 46.02% of the total sample. Specifically, same industry M&As comprise 46.13% in the private group, and 45.61% in the public group. In total, 39.81% of the deals are paid for in cash. More specifically, 36.9% of private deals are paid in cash and 50% of public deals. Finally, the average relative size of all sample is 0.04, and the relative size of bidders is larger when acquiring public target than private targets.
Panel B of Table 4 provides an overview of the correlation matrix of all variables applied in the analysis. The correlation between the dependent variable CAR (-2, +2), the independent variables firm corporate governance, country corporate governance and target listing status and all control variables are all under 0.5, which indicates that there is no strong correlation with independent variables or control variables
5.2. Regression analysis
5.2.1. Bidder announcement return with firm governance and country governance
24
provides a possible explanation for this result. Regarding small-sized firms, strong firm governance induced the use of monitoring costs, time and resources, which may offset the benefits of firm governance. More specifically, corporate governance is more important when firms rely heavily on external financing. In the sample used in this thesis, small-sized bidders are included in the sample and there is no evidence about whether they rely on external financing. This could explain why the results show that a bidder’s firm governance has no effect on bidder’s return. Lastly, since this thesis apply limited sample of M&A deals, which may lead to the insignificant relationship between bidder’s firm governance and bidder’s return.
Table 5. Regressions of firm-level and country-level corporate governance on CAR (-2, +2)
Variables CAR (-2, +2)
Model 1(only controls) Model 2(Firm CG) Model 3(Country CG)
Intercept 0.2590*** (0.0852) 0.2568*** (0.0854) 0.2636*** (0.0856) Firm CG -0.0001 (0.0001) Country CG -0.0015 (0.0023) Acq GDP 0.0002 (0.0039) 0.0007 (0.004) 0.0002 (0.0039) Tar GDP -0.0042* (0.0023) -0.0042* (0.0023) -0.0042* (0.0023) CASH 0.0010 (0.0045) 0.0011 (0.0045) 0.0013 (0.0045) RLS 0.0491** (0.0217) 0.0482** (0.0218) 0.0476** (0.0219) IND 0.0023 (0.0051) 0.0022 (0.0051) 0.002 (0.0051) ATT 0.0015 (0.0108) 0.0014 (0.0108) 0.0014 (0.0108) INT 0.0176* (0.009) 0.0181** (0.009) 0.0165* (0.0091) LEV 0.0297 (0.0202) 0.0303 (0.0202) 0.0308 (0.0203) TQ -0.0047* (0.0026) -0.0046* (0.0026) -0.0046* (0.0026) SIZE -0.0025 (0.0018) -0.0025 (0.0018) -0.0025 (0.0018)
Year fixed effect YES YES YES
Industry fixed effect YES YES YES
Observations 515 515 515
Adjusted R-square 0.0586 0.0570 0.0572
25
The Model (3) presents the relationship between country-level corporate governance and the bidder’s announcement return. From this, it can be concluded that the country corporate governance of the target has an insignificant and negative influence on bidder’s return (β==-0.0015, p>0.1). This indicates a insignificant relationship between country-level governance and bidder’s return. Furthermore, the Model (1) presents the results of the control variables and CAR (-2, +2). In detail, both target GDP and Tobin’s Q has negative and significant results, which suggest that the target GDP per capita and bidder’s Tobin’s Q can negatively affect the bidder’s return. Moreover, both the relative size of transaction and the degree of internationalization has a positive coefficient, which show that these two variables have a positive effect on the bidder’s return. Additionally, the target GDP, relative size, internationalization level and Tobin’s q are remaining significant in Model (2) and Model (3).
5.2.2. Interactions between firm CG, country CG, and private dummy
26
Table 6. Regression of interactions between firm CG, country CG, and private targets on CAR (-2, +2) Variables CAR (-2, +2) Firm CG*Country CG Only private Country CG*Private Firm CG*Private Full model Intercept 0.2796*** (0.0877) 0.2574*** (0.0857) 0.2604** (0.0879) 0.2644** (0.0869) 0.2515*** (0.0919) Firm CG -0.0004 (0.0004) -0.0002 (0.0002) 0.0008 (0.0008) Country CG -0.0078 (-0.0078) -0.0011 (0.0052) 0.0136 (0.0128) Private dummy -0.0019 (0.0088) -0.0007 (0.0228) -0.0092 (0.0157) 0.1048* (0.0597) Firm CG*Country CG 0.0001 (0.0001) -0.0003 (0.0002) Firm CG*Private 0.0001 (0.0002) -0.0016* (0.0009) Country CG*Private -0.0004 (0.0057) -0.0301** (0.0149) Firm CG*Private*Country CG 0.0005** (0.0002) Acq GDP 0.0003 (0.004) 0.0003 (0.0039) 0.0003 (0.0039) 0.0005 (0.004) 0.00001 (0.004) Tar GDP -0.0044 (0.0023)* -0.0040* (0.0024) -0.0041* (0.0024) -0.0043* (0.0024) -0.0052** (0.0024) CASH 0.0019 (0.0045) 0.0009 (0.0045) 0.0012 (0.0045) 0.001 (0.0045) 0.0020 (0.0046) RLS 0.0485** (0.022) 0.0486** (0.0219) 0.0472** (0.0222) 0.0466** (0.022) 0.0427* (0.0224) IND 0.0020 (0.0051) 0.0022 (0.0051) 0.0019 (0.0051) 0.0024 (0.0051) 0.0023 (0.0051) ATT 0.0018 (0.0108) 0.0017 (0.0108) 0.0015 (0.0109) 0.0015 (0.0108) 0.0026 (0.0108) INT 0.0175* (0.0092) 0.0177** (0.009) 0.0166* (0.0091) 0.0184** (0.009) 0.0180* (0.0092) LEV 0.0311 (0.0203) 0.0302 (0.0203) 0.0314 (0.0204) 0.032 (0.0205) 0.0342* (0.0205) TQ -0.0046* (0.0026) -0.0047* (0.0026) -0.0046 (0.0026) -0.0046* (0.0026) -0.0046* (0.0026) SIZE -0.0024 (0.0018) -0.0025 (0.0018) -0.0026 (0.0018) -0.0025 (0.0018) -0.0027 (0.0018)
Year fixed effect YES YES YES YES YES
Industry fixed effect YES YES YES YES YES
Observations 515 515 515 515 515
Adjusted R-square 0.0555 0.0562 0.0523 0.053 0.0581
27
industry, and equal to zero otherwise. CASH refers to method of payment and equals to one if payment is paid all in cash. RLS is relative size and measured by transaction value relates to the bidder’s market capitalization. All firm-level variables are winsorized at 1% for both sides Moreover, the standard error is presented in parentheses. ***, **, and * indicate significance at the 1%, 5%, and 10% level, respectively. Fixed effect of industry and year are included.
According to the full model in the fifth column, in order to test hypothesis 3b, the interaction between country governance, firm governance and private target provides a significant and positive result (β=0.0005, p<0.05). This indicates that the combined effect of bidder’s firm governance and target’s shareholder protection on bidder’s return will be moderated by target’s listing status. Due to the fact that the interaction effect of bidder’s firm governance and target’s shareholder protection is insignificant, and the effect of firm-level governance on bidder’s return is insignificant, either. Therefore, it can be concluded that acquiring a private target can moderate the effect of bidder’s firm governance on bidder’s return when target firm with high shareholder protection, as implied by the significantly positive interaction between firm CG, country CG, and the private dummy. Specifically, those three factors can only affect bidder's return when they are combined together. A possible explanation is that when a bidder with good governance acquires a target in a country with good protection, the difference between the bidder’s firm governance and the target’s shareholder protection is not significant. Thus, it is not easy for a bidder with good governance to obtain profit from a target firm with good shareholder protection. However, if the target firm is a private firm, the discount effect of private firms decreases the valuation of target firms and enhances the bidder’s return. Therefore, the combined effect of the bidder’s firm-level governance, bidder’s announcement return, and the target’s country-level governance is significantly affected by target’s listing status. Hypothesis 3b is therefore supported. Furthermore, relative size, internationalization, and Tobin’s Q are constantly significant. The target GDP per capita is only insignificant in the first model.
5.2.3. Interaction between firm governance and country governance of private and public targets
28
public target. This result is consistent with the result of the interaction between bidder’s firm governance*private dummy in Table 6, it also presents that private dummy does not have moderate effect on the relationship between the governance of bidder and bidder’s return. Therefore, since there is no significant difference of bidder’s firm governance on bidder’s return when acquiring private or public target, the hypothesis 3a is not supported.
Table 7. Regressions of interactions between firm CG and CAR (-2, +2) of private and public targets
Variables CAR (-2, +2) Private Public Intercept 0.0081 (0.0863) 0.0768 (0.0931) 0.2933 (0.2005) 0.2152 (0.1984) Firm CG -0.0001 (0.0001) -0.0008* (0.0004) -0.0001 (0.0003) 0.0015 (0.0009) Country CG -0.0153* (0.0079) 0.0155 (0.0154) Firm CG*Country CG 0.0002* (0.0001) -0.0004* (0.0002) Acq GDP (0.0043) 0.0038 (0.0043) 0.0031 (0.016) -0.008 (0.0156) -0.0052 Tar GDP -0.0011 (0.0028) -0.0018 (0.0028) -0.0057 (0.006) -0.0085 (0.0059) CASH -0.0021 (0.0051) -0.0008 (0.0052) -0.0066 (0.0136) -0.0051 (0.0126) RLS 0.0861** (0.0345) 0.0855** (0.0347) 0.0145 (0.034) -0.0075 (0.0347) IND 0.006 (0.0055) 0.0059 (0.0055) -0.0087 (0.0182) -0.0066 (0.0177) ATT -0.012 (0.0166) -0.0111 (0.0166) 0.0031 (0.0237) 0.0006 (0.0233) INT 0.0176* (0.01) 0.0176* (0.0101) 0.0307 (0.0293) 0.0161 (0.0308) LEV 0.0485** (0.0233) 0.0493** (0.0234) 0.0388 (0.0633) 0.0618 (0.0625) TQ -0.0031 (0.0028) -0.0032 (0.0028) -0.0155* (0.0083) -0.0151* (0.0081) SIZE -0.0021 (0.002) -0.0022 (0.002) 0.0032 (0.0067) 0.0049 (0.0066)
Year fixed effect YES YES YES YES
Industry fixed effect YES YES YES YES
Observations 410 410 114 114
Adjusted R-square 0.045 0.0506 0.1365 0.1857
29
Moreover, in Table 7, the second column and fourth column present the results of interaction between bidder’s firm governance and target’s shareholder protection in. For private target, target’s shareholder protection can positively and significantly moderate the relationship between bidder’s firm governance and bidder’s return. This finding is consistent with the positive result of interaction of Firm CG*Private*Country CG in Table 6, which also indicate that acquiring a private target in good shareholder protection country can positively moderate the effect of bidder’s firm governance on bidder’s return. These findings further confirm that the hypothesis 3b is supported. Furthermore, for public group, the coefficient show that target’s shareholder protection can negatively and significantly moderate the relationship between bidder’s firm governance and bidder’s return. Additionally, regarding the control variables. In the case of private target, the bidder’s relative size, internationalization, and leverage is positively and significantly affect bidder’s return. In contrast, in the case of public target, only Tobin’s Q is negatively and significantly affect the bidder’s return.
5.2.4. Interaction between the components of firm CG with the full model, without private dummy
Table 8 presents the regressions of firm CG components on CAR in the full model without private dummy. The first to the fifth column describe the function of board of directors (CGBF), structure of the board of directors (CGBS), compensation policy of the board of directors (CGCP), company vision and strategy (CGVS), and shareholder rights (CGSR). The results indicate that there are no significant interactions between different proxies of firm governance and country governance on bidder’s return, and that both firm governance and country governance have an insignificantly negative influence on the bidder’s return. Moreover, target GDP, internationalization and Tobin’s Q are significant at 10%, while the relative size is significant at the 5% level. These results are consistent with the existing results that use the single corporate governance score as a proxy.
30 (0.0039) (0.0041) (0.004) (0.0039) (0.0039) Tar GDP -0.0041* (0.0023) -0.0044* (0.0024) -0.0042* (0.0023) -0.0042* (0.0023) -0.0044* (0.0024) CASH 0.0016 (0.0045) 0.0014 (0.0045) 0.0013 (0.0045) 0.0015 (0.0045) 0.0018 (0.0045) RLS 0.0475** (0.221) 0.0480** (0.0219) 0.0461** (0.022) 0.0475** (0.0219) 0.0470** (0.0219) IND 0.0019 (0.0051) 0.0020 (0.0051) 0.0017 (0.0051) 0.0023 (0.0051) 0.0016 (0.0051) ATT 0.0020 (0.0108) 0.0016 (0.0108) 0.0009 (0.0108) 0.0020 (0.0108) 0.0015 (0.0108) INT 0.0172* (0.0092) 0.0165* (0．0092) 0.0175* (0.0092) 0.0163* (0.0091) 0.0162* (0.0092) LEV 0.0313 (0.0203) 0.0306 (0.0204) 0.0317 (0.0203) 0.0313 (0.0204) 0.0313 (0.0204) TQ -0.0045* (0.0026) -0.0046* (0.0026) -0.0044* (0.0026) -0.0046* (0.0026) -0.0045* (0.0026) SIZE -0.0024 (0.0018) -0.0025 (0.0019) -0.0030 (0.0018) -0.0026 (0.0018) -0.0025 (0.0021)
Year fixed effect YES YES YES YES YES
Industry fixed effect YES YES YES YES YES
Observations 515 515 515 515 515
Adjusted R-square 0.0552 0.0533 0.0556 0.0548 0.0555
Note: This table presents the interactions between five components of firm governance, target’s shareholder protection and bidder’s return. Acq GDP and tar GDP are shown in US$ amount. LEV is total debt divided by market value of total assets. INT refers to Foreign sales divided by total sales. SIZE is the bidder’s firm size and measured by natural logarithm of bidder’s total assets TQ is the ratio of market capitalization to a total asset of the acquirers. ATT is attitude which equals to one if a merger and acquisition attitude is defined as friendly and zero otherwise. IND is industry relatedness which equals to one if bidder and target are in the same industry, and equal to zero otherwise. CASH refers to method of payment and equals to one if payment is paid all in cash. RLS is relative size and measured by transaction value relates to the bidder’s market capitalization. All firm-level variables are winsorized at 1% for both sides Moreover, the standard error is presented in parentheses. ***, **, and * indicate significance at the 1%, 5%, and 10% level, respectively. Fixed effect of industry and year are included.
5.2.5. Interaction between the components of firm CG with the full model
31
Table 9. Regression of firm CG components on CAR (-2, +2) with private dummy Variables CAR (-2, +2) CGBF CGBS CGCP CGSR CGVS Intercept 0.2588*** (0.0904) 0.2542*** (0.0958) 0.2564** (0.0909) 0.2646*** (0.0899) 0.2103 (0.1086) Firm CG 0.0004 (0.0008) 0.0002 (0.0009) 0.0006 (0.0008) 0.0004 (0.0007) 0.0007 (0.0007) Country CG 0.008 (0.0118) 0.0012 (0.0123) 0.0103 (0.0132) 0.0067 (0.0089) 0.0148 (0.0158) Private dummy 0.0527 (0.0553) 0.0298 (0.0572) 0.0505 (0.0598) 0.0462 (0.0414) 0.0829 (0.0658) Firm CG*Country CG 0.0002 (0.0002) -0.00004 (0.0002) -0.0002 (0.0002) -0.0002 (0.0002) -0.0002 (0.0002) Firm CG*Private -0.0009 (0.0009) -0.0005 (0.001) -0.0008 (0.0009) -0.0009 (0.0008) -0.0012 (0.0008) Country CG*Private -0.0173 (0.0138) -0.0078 (0.0140) -0.0149 (0.015) -0.0166 (0.0107) -0.0253 (0.0167) Firm CG*Private*Country CG 0.0003 (0.0002) 0.0001 (0.0002) 0.0003 (0.0002) 0.0003 (0.0002) 0.0004* (0.0002) Acq GDP 0.0003 (0.004) -0.0002 (0.0041) 0.0012 (0.004) 0.0001 (0.0039) 0.0007 (0.0039) Tar GDP -0.0048** (0.0024) -0.0043* (0.0024) -0.0044* (0.0024) -0.0045* (0.0024) -0.0044* (0.0024) CASH 0.002 (0.0046) 0.0012 (0.0046) 0.0013 (0.0045) 0.0014 (0.0045) 0.001 (0.0046) RLS 0.042* (0.0227) 0.0492** (0.0225) 0.0416* (0.0226) 0.0446** (0.0223) 0.0451** (0.0223) IND 0.0023 (0.0051) 0.0019 (0.0052) 0.0018 (0.0051) 0.0027 (0.0051) 0.0017 (0.0052) ATT 0.0008 (0.0109) 0.0021 (0.0109) 0.0017 (0.0109) 0.0022 (0.0109) 0.0037 (0.0109) INT 0.0189 (0.0093) 0.0166 (0.0092) 0.0181* (0.0092) 0.0159* (0.0092) 0.0160* (0.0092) LEV 0.0365 (0.0207) 0.0311 (0.0206) 0.0337 (0.0206) 0.0348* (0.0208) 0.0334 (0.0206) TQ -0.0044 (0.0026) -0.0047 (0.0026) 0.0337* (0.0206) -0.0044* (0.0026) -0.0043 (0.0026) SIZE -0.0026 (0.0018) -0.0025 (0.0019) -0.0031* (0.0019) -0.0028 (0.0018) -0.0028 (0.0021)
Year fixed effect YES YES YES YES YES
Industry fixed effect YES YES YES YES YES
Observations 515 515 515 515 515
Adjusted R-square 0.0535 0.0441 0.0494 0.0547 0.0546
32
relatedness which equals to one if bidder and target are in the same industry, and equal to zero otherwise. CASH refers to method of payment and equals to one if payment is paid all in cash. RLS is the relative size and measured by transaction value relates to the bidder’s market capitalization. All firm-level variables are winsorized at 1% for both sides Moreover, the standard error is presented in parentheses. ***, **, and * indicate significance at the 1%, 5%, and 10% level, respectively. Fixed effect of industry and year are included.
Additionally, Table 10 presents a short summary of hypothesis testing. Compared to the argument of literature, the analysis results indicate that hypothesis 1, hypothesis 2 and hypothesis 3a is not supported, while hypothesis 3b is supported.
Table 10. Summary for hypothesis testing
Hypothesis Literature Results
H1: The acquiring firm’s
firm-level corporate governance positively affects the bidder’s
announcement stock returns.
Positive relationship
Reasons: better governance can improve a firm’s operating performance, and its ability to organize excess resources, and can also decrease the cost of capital.
However, weak governance can encourage firms to engage in less risk-averse projects to get benefits, and avoids the overinvestment.
Not supported
H2: The relationship between the
bidder’s firm-level governance and the bidder’s announcement return is affected by country-level
governance.
Country-level governance positively affects bidder’s return.
The relationship between firm-level governance and country-level governance is positive.
The target’s country governance can moderate the relationship between the bidder’s firm governance and bidder’s return
Not supported
H3a: The relationship between the
bidder’s firm-level governance and the bidder’s announcement return is different for private and
public targets
Private benefits include: information being less exposed, better monitoring and due diligence, lower sale prices and other potential benefits.
Public benefits include: better investment scrutiny, reduced information asymmetry problems, a liquid market for shares.
The target listing status can moderate the relationship between the bidder’s firm-level governance and bidder’s return
Not supported
H3b: The combined effect of the
bidder’s firm-level governance and the target’s country-level
governance on the bidder’s announcement return is affected
by target’s listing status
Bidder’ return is positive when public targets with weaker country governance, and bidder’ return are positive when private targets with stronger country governance.
The combined interaction between bidder’s firm governance, target’s listing status and target listing status have a significant effect on bidder’s return
Supported
5. Conclusion
33
influences the bidder’s return. This thesis is motived by these interactions, and aims to investigate how the bidder’s firm-level governance affect the bidder’s return. It also examines whether the target listing status and target’s shareholder protection moderate the relationship between the bidder’s firm governance and the bidder’s return, respectively. This thesis explores the combined effects of the above three variables on the bidder’s return. The data are collected from Thomson Reuters and DataStream, and the sample consists of 515 cross-border M&A deals. There are 401 deals for private targets from 2009 to 2013, and 114 for public targets from 2002 to 2013, respectively. Additionally, the OLS estimation method is applied to test hypotheses.
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shareholder protection, and those three factors can only affect bidder's return when they are combined together. Therefore, although the good governance bidder is difficult to extract wealth from a target firm in a country with good shareholder protection. This is because the result shows that the difference between bidder’s firm governance and target’s country shareholder protection is not significant when a bidder with good governance acquires a firm with good protection. However, if the target is a private firm, the discount effect of the private firm decreases the valuation of private firms, bidder’s return is enhanced.
Some managerial implications result from this thesis. To achieve more profits from cross-border M&As, it is common for managers to improve their own company’s firm corporate governance. Based on the findings of this thesis, the target’s country-level governance also plays a role during cross-border M&As. For this reason, managers should classify the level of the target’s country governance. Moreover, regarding the different impact of private and public targets on bidder’s return, it is suggested that managers should pay particular attention to the target listing status. This thesis provides suggestions for selecting target firms with different level of corporate governance, which should further help to improve the quality of decision-making. Furthermore, managers should consider the combined effects of their firm-level governance, target’s country-level governance, and the target’s listing status on the bidder’s gain. Lastly, the results suggest that bidder’s international experiences have a positive effect on bidder’s return. Hence, in order to improve the gain from cross-border M&As, managers should increase the degree of internationalization.
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