Cross-Border Mergers and Acquisitions
The Impact of Cultural Differences and Firm Relatedness on the Wealth
Effects of Chinese Acquirers
Master Thesis
M.Sc. International Business & Management
Daniel Georg Schwarz
d.g.schwarz@student.rug.nl
Student Number: S3526887
University of Groningen, The Netherlands
Faculty of Economics and Business
Duisenberg Building 9700 AB Groningen
Supervisor: Prof. Dr. D. J. Bezemer Co-Assessor: Dr. M. J. Klasing
ABSTRACT
This study investigates Chinese cross-border mergers and acquisitions and examines the shareholder wealth effects of 149 deals between 2012 and 2017 for Chinese market-listed firms. Beyond the empirical analysis of wealth effects for acquiring companies from China, this study surveys the effects of cultural distance and firm relatedness on the shareholder value creation. Furthermore, the empirical findings are discussed with the focus on academic relevance and business-related consequences.
Keywords: Cross-Border Mergers & Acquisitions (CBM&A), Chinese CBM&A, Wealth
TABLE OF CONTENTS 1. INTRODUCTION ... 1 1.1 Motivation ... 1 1.2 Research Question ... 3 1.3 Research Structure ... 3 2. LITERATURE REVIEW ... 4
2.1 Cross-Border Mergers and Acquisitions ... 4
2.1.1 Motives of CBM&A ... 4
2.1.2 Stages of CBM&A ... 5
2.1.3 Risks of CBM&A ... 7
2.1.4 Performance Measurement in CBM&A ... 10
2.2 Cultural Distance ... 12
2.2.1 Cultural Dimensions of Hofstede ... 12
2.2.2 National Cultural Distance ... 13
2.3 Firm Relatedness ... 15
2.4 Wealth Effects and the Impact of Cultural Differences and Firm Relatedness ... 16
3. DATA AND METHODOLOGY ... 20
3.1 Sample ... 20
3.2 Data ... 20
3.3 Empirical Model ... 23
4. RESULTS... 29
4.1 Multicollinearity and Descriptive Statistics ... 29
4.2 Paired Samples t-Test ... 30
4.3 Regression Analysis ... 31
5. CONCLUSION ... 34
5.1 Discussion ... 34
5.2 Limitations and Recommendations for Future Research ... 35
5.3 Conclusion ... 36
REFERENCES ... 38
APPENDICES ... 46
APPENDIX A: List of Cross-Border Mergers and Acquisitions ... 46
APPENDIX B: Cumulative Abnormal Returns of Acquiring Firms ... 51
APPENDIX C: Cultural Distance Scores ... 54
APPENDIX D: Firm Relatedness and SIC Code System ... 55
APPENDIX E: Variance Inflation Factors ... 62
APPENDIX F: Correlation Matrix ... 63
APPENDIX G: Data Overview Multiple Regression Analysis ... 64
APPENDIX H: Model Summary... 67
APPENDIX I: ANOVA ... 67
LIST OF TABLES AND FIGURES
Tables
Table 1 Descriptive Statistics
Table 2 ARs and CARs for Chinese Firms in CBM&A Table 3 Coefficients
Figures
LIST OF ABBREVIATIONS
Concepts
FDI - Foreign Direct Investments M&A - Mergers and Acquisitions
CBM&A - Cross-Border Mergers and Acquisitions LOF - Liability of Foreignness
MNE - Multinational Enterprise KPI - Key Performance Indicators
Methodology
AR - Abnormal Return
CAR - Cumulative Abnormal Return
CD - Cultural Distance
VIF Variance Inflation Factor
ANOVA Analysis of Variance
CTL Collinearity Tolerance Level
Organizations
1. INTRODUCTION
1.1 Motivation
The distribution of Foreign Direct Investments (FDI) between China and the rest of the world has changed rapidly over the past decade. This trend leads to a new balance of power in the global field of Mergers & Acquisitions (M&A). The extensive M&A activities of Chinese companies have reached USD 216.42 billion in 2016 (Worldbank, 2018) which is a significant increase in comparison to the investment activities in 2012 (USD 65.2 billion) (Wu, Yang, Yang and Lei, 2016).
The immense growth in cross-border mergers and acquisitions (CBM&A) is the result of the increasing trend of globalization, privatization and liberalization in emerging markets and the consolidation of industries (Shimizu, Hitt, Vaidyanath, & Pissano, 2004). Du and Boateng (2012) identified two specific reasons for international investments in literature, which are based on strategic and economic/financial motives. The strategic motives of Chinese CBM&A are resource-based and characterized by focussing on market development, by obtaining technological or other resources and by increasing the company`s diversification level (Boateng, Qian & Tianle, 2008). Furthermore, the development of investments from emerging markets is caused by institutional changes in these countries. In this case, the liberalization of state policies and the access to financial resources are the main reasons for increasing FDI (Nayyar, 2008).
The increasing trend of Chinese CBM&A causes a growing interest in research on the impact and outcomes of those investments for market-listed companies in China. Especially in terms of financial performance, only half of all CBM&A achieve the required expectations (Cartwright & Cooper, 1993a). Ravenscraft and Scherer (1987) have discovered that even more than two-thirds of all investments fail regarding their profitability targets. Considering the costs and expectations related with mergers and acquisitions, the tolerance for negative outcomes is low and companies focus to identify and reduce potential risks. Therefore, the investigation of the performance of acquiring and target firms is highly relevant.
the fact that research has not delivered significant and respective results on the particular influencing factors for financial performance in M&A (King, Dalton, Daily & Covin, 2004). Supporting this situation in research, there is an increasing interest in the effects of cultural differences on the overall M&A process (Cartwright & Schoenberg, 2006).
Regarding the previous research on how cultural differences impact the stock-market performance of CBM&A there are three main perspectives. The first perspective of research states that cultural differences lead to risks and affect CBM&A in a negative way (David and Singh, 1994). Furthermore, Datta and Puia (1995) provides evidence that differences in culture between two or more nations are often resulting in a negative performance of CBM&A and lead to conflicts. The second perspective on the impact of national differences states a positive relation or at least reveals that there is an unrelated connection (Morosini, Shane & Singh, 1998). Furthermore, cultural differences can be seen as the origin of innovation, learning and value creation before, during and after transnational mergers and acquisition (Harrison, Hitt, Hoskisson & Ireland, 1991; Morosini et al., 1998; Vermeulen & Barkema, 2001). The third perspective states that cultural differences neither have a positive nor a negative impact on CBM&A by obtaining non-significant results in researches (Larsson & Finkelstein, 1999; Bessler & Murtagh, 2002). These different results referring to the impact of CBM&A are contradictory, inconclusive and call for further investigation on this specific field of interest (Schoenberg, 2000; Schweiger & Goulet, 2000; Stahl & Voigt 2005; Teerikangas & Very, 2006).
Concluding the discussion about the shareholder wealth effects of CBM&A for Chinese acquirors and the influence of national differences and firm relatedness of the companies involved it can be summarized that M&A are complex processes that require a consolidated research approach, which combines theories from different disciplines. This aggregated perspective would lead to a better comprehension of the issue how cultural distance and the firm relatedness of acquiring and target firms affect the overall wealth effects for Chinese shareholders in CBM&A, based on the stock-market performance (Stahl & Voigt, 2004b).
1.2 Research Question
This study is interested in the stock-market performance of Chinese acquiring firms in CBM&A and the consequent shareholder wealth effects. As argued in many CBM&A literature (Boateng, Qian & Tianle, 2008; Bhagat, Malhotra & Zhu, 2011), there are different effects on the shareholder value creation caused by international investments of acquiring companies. The increasing number of CBM&A from emerging markets and the importance of Chinese FDI worldwide intensify the need for additional academic research on this topic. In addition to empirically examining the wealth effects of investing firms, this study investigates the impact of cultural distance and firm relatedness on such effects. This further research is justified by the impact of cultural distance on CBM&A (Bauer, Matzler & Wolf, 2014; Stahl & Voigt, 2008) and the role of firm relatedness as an influencing factor for those investments (Das & Kapil, 2012). Therefore, this study answers the following research question:
What are the shareholder wealth effects for Chinese acquirers in CBM&A and how do cultural distance and firm relatedness influence such effects?
1.3 Research Structure
2. LITERATURE REVIEW
The section 2.1 will review relevant literature concerning cross-border mergers and acquisitions. Section 2.2 will introduce cultural distance as a concept and will end with a detailed discussion about national culture distance. Section 2.3 presents the concept of firm relatedness and will subsequently lead over to section 2.4, which discusses the shareholder wealth effects and the influence of cultural differences and firm relatedness on CBM&A. This last section will further present the hypotheses for this study.
2.1 Cross-Border Mergers and Acquisitions
This study will create a well-defined theoretical foundation of CBM&A. First, the motives of CBM&A will be discussed followed by the stages of CBM&A. Also, the potential risks of CBM&A will be explained. At the end of this section the different approaches of performance measurement in CBM&A are analysed.
2.1.1 Motives of CBM&A
The transaction of CBM&A becomes a popular entry possibility for companies from developing markets into other companies worldwide (Aulakh, 2007). This trend gets supported by Caiazza and Ferrara (2016) who state that CBM&A are already more attractive than domestic investments. In the context of Chinese transnational investment activities, this trend is still at the starting point and the future development will come up with a long growth phase. That means that Chinese firms will become a global player in CBM&A and the investment volume and frequency will increase significantly during the following years (Cogman, Gao & Leung, 2017).
countries (Boateng et al., 2008). The strategic motives include the approach to benefit from additional information sources and outlooks through acquisitions into foreign markets (Van Knippenberg & Schippers, 2007). Another key driver of strategic investments is the vast technological change. Companies try to ensure and increase their market shares by staying technological competitive and serve customers around the globe. Therefore, companies are highly seeking for technologies, which allow them to safeguard these targets and continue their internationalization strategy (DePamphilis, 2009).
One of the main targets and motives of CBM&A can be summarized under the concept of synergy creation. These synergies can occur in cost, revenue, operational and financial related contexts (Cartwright & Schoenberg, 2006; Erel, Julio, Kim & Weisbach, 2011; Galpin & Herndon, 2014) and they are positively associated with CBM&A. Bhagat et al. (2011) gives an example for positive synergy effects through a better utilization of target’s assets in combination with acquirer’s assets. These synergies then lead to advantages for both companies, which are involved in the merger or acquisition deal (Hovers, 1974).
The described motives above are applicable for Chinese investment activities as well. Additionally, firms from emerging markets show specific reasons and actions in terms of CBM&A. After decades of domestic growth, Chinese firms want to take part in the global competition and therefore they use their dominant geographic position to expand globally. During this process, these companies use mergers and acquisitions frequently to access markets and penetrate developed countries (Caiazza & Very, 2015). Moreover, China’s very large domestic market base leads to economies of scale for local companies. This advantage supports and increases cross-border investments. In addition, it motivates firms to seek knowledge and information outside of their home country (Ng, Chatzkel, Lau, & Macbeth, 2012).
2.1.2 Stages of CBM&A
Pre-Purchase Decision Activities
The pre-deal phase is highly important to the overall success of M&As and requires a careful analysis of firms’ corporate strategies and the evaluation of potential target firms (Epstein, 2005). The main tasks during this phase are to create an acquisition plan, to search for potential target companies in combination with a detailed screening, to determine potential business opportunities and to get into contact with selected companies (DePamphilis, 2009).
Weddigen, 2004; Zaheer, Castaner & Souder, 2013). The evaluation of synergies has priority in the pre-purchase phase and builds the basis for the entire strategic analysis during the planning process. This evaluation requires adequate methods and tools to guarantee reliable outcomes (Kode, Ford & Sutherland, 2003; Colombo, Conca, Buongiorno & Gnan, 2007). Concluding the previous section, the calculation of the expected synergy value is the most demanding and important task to safeguard M&A performance (Larsson & Finkelstein, 1999). The pre-purchase decision activities are mainly concentrated on financial and strategic topics as described above. The relevance of cultural issues in this phase are only poorly discussed and postponed to subsequent stages. Therefore, organizations should expand their attention to cultural aspects and in addition align the level of importance to financial and strategic issues (Weber, Shenkar & Raveh, 1996). This broader perspective would enrich the pre-merger decision process and complete the analysis of synergies meaningful. An additional aspect to improve this stage would be a stronger linkage between the pre- and post-merger phase by planning a potential integration process already in the pre-purchase stage (Howell, 1970; Hunt, 1990). Especially cross-border investments require a careful and comprehensive analysis, which considers the entire process of the deal to avoid potential risks and safeguard successful outcomes.
Purchase Decisions
As mentioned previously, the negotiation process succeeds the selection and due diligence phase after a successful completion. This process becomes important because researchers hold the opinion that acquirers often pay premiums on the market acquisition price (Shimizu et al., 2004). This fact can be proofed by the comparison of domestic and foreign target firms’ wealth gains (Harris & Ravenscraft, 1991; Inkpen, Sundaram & Rockwood, 2000). These premiums could be caused by an excessively bidding behaviour of foreign investors or by a strong expansion interest of acquirers who want to gain advantages of foreign markets such as tax benefits, market potential or reliable capital markets (Harris & Ravenscraft, 1991; Inkpen et al., 2000).
Post-Purchase Decision Activities
The post-deal stage is dominated by the integration process, which is essential for the overall success of domestic and foreign mergers and acquisitions (Child, Faulkner & Pitkethly, 2001). This process can become more difficult if the acquirer and target company originates from different countries and challenges caused by varieties of corporate and national culture arise (Shimizu et al., 2004). The issue of integrating both corporate and national culture after a successful acquisition is described as double-layered acculturation (Barkema, Bell & Pennings, 1996). This study focuses on the effects of national varieties between China and other countries because recent research shows the additional challenges for post-deal integration resulting from cultural differences between acquirer and target company (Shimizu et al., 2004). Conclusively, the impact of national cultural varieties on the overall post-merger performance differ from deal to deal and must be analysed individually. Still, there are potential positive effects resulting from cultural varieties regarding the theory of organizational learning (Morosini et al., 1998). Vermeulen and Barkema (2001) give further evidence by stating that greater cultural differences increase the probability to learn or benefit from the target company. Additionally, they discovered that CBM&A are a crucial source to acquire additional capabilities and knowledge, which have a positive influence on the acquirers’ strategic flexibility.
2.1.3 Risks of CBM&A
cultural distance and firm relatedness concerning the target and acquiring firm. Culture is described as a potential source of conflict during acquisitions and creates disparate bargaining relationships (Cartwright & Cooper, 2014). Therefore, the following sections discuss the main issues, which are directly related to cultural differences in transnational investments and the sections highlight the specific risks for Chinese companies during mergers and acquisitions worldwide.
Liability of Foreignness
The liability of foreignness (LOF) is a concept which describes the costs companies face when they operate in foreign markets (Gaur, Kumar & Sarathy, 2011). The authors differentiate between two sources of LOF – environmentally created LOF and firm-based LOF. On one hand, the environmentally derived LOF originates from the home and host country surrounding, whereas the firm-based LOF accrues by firm-specific characteristics like ownership structure or networks (Gaur, Kumar & Sarathy, 2011). The key driver of LOF is defined as the institutional distance which creates costs by unfamiliarity with different cultures, lacks of legitimacy and institutional issues in host countries (Teerikangas & Very, 2006). Moreover, additional costs can occur by lack of market knowledge or insufficient business relationships (Zaheer, 1995). The institutional distance goes hand in hand with national cultural distance and influence the strategy which ownership model acquiring companies chose when they invest in foreign countries (Eden & Miller, 2004). LOF can create immense financial disadvantages for international corporations in comparison to firms which only operate in their home markets (Pablo & Javidan, 2009).
Double-Layered Acculturation
The double-layered acculturation is a concept that describes the adaption process of foreign national culture and new corporate culture in companies after mergers and acquisitions (Shimizu et al., 2004). This concept is a major obstacle in the integration process caused by the interaction of organizational and national cultures, which can create conflicts and negative effects for the involved companies (Barkema et al., 1996). Very et al. (1996) support these findings and confirm that the double-layered acculturation has a disruptive influence on the post-merger integration. The parallel confrontation with both organizational and national cultures can lead to a performance decrease on the employees’ side due to lower commitment, resignation or flawed behaviour (Nahavandi & Malekzadeh, 1988). Furthermore, there is a possibility for companies to suffer from long-term consequences caused by the double-layered acculturation in terms of a decrease in shareholder value or declining productivity (Morosini et al., 1998; Larsson & Lubatkin, 2001; Weber, Yedidia Tarba & Reichel, 2009). Especially deals between companies which plan to fully merge have to handle this concept carefully to overcome negative effects and achieve the overall targets (Nahavandi & Malekzadeh, 1988; Chatterjee et al., 1992). In this case, both parties have to understand and deal attentively with the interconnections of organizational and national culture (Teerikangas & Very, 2006). If there is no common understanding and consensus about the acculturation mode that will have an immense negative influence on the success of the M&A (Nahavandi & Malekzadeh). Finally, corporations have to be aware of the challenging tasks which come along with the double-layered acculturation. This awareness is positively related to the longevity of foreign acquisitions and can be increased by previous experiences in international investments (Andersson, Johanson & Vahlne, 1997). The learning effects of prior experiences in acquisitions are strong if corporations invest in different cultural blocks and they are very high if companies have invested before in the same foreign country (Andersson et al., 1997). The main conclusion of this section states that organizational and national culture lead to additional issues in CBM&A (Barkema et al., 1996). Hence, the national culture including its characteristics, differences, roles and performance implications in CBM&A will be discussed in section 2.2.
Risks for Chinese outward M&A
between Chinese investors and foreign target companies and different degrees of firm relatedness.
The overseas investments of Chinese corporations are extremely demanding and involve a lot of risks. There are three major obstacles Chinese companies face when they invest in foreign markets. Firstly, Chinese corporations are confronted with a strong regulatory process if they want to acquire firms in foreign countries (Deloitte, 2011). A survey conducted by Deloitte (2011) states that the acquiring firms have to face protectionism and national security controls by foreign authorities in target countries. Secondly, the macroeconomic volatility in form of fluctuating financial markets around the globe distorts cognition of the market-conform target firm value (Deloitte, 2011). Lastly, cultural issues complicate an effective cooperation between acquiring and target company including the trust building process between both parties involved (Deloitte, 2011). The cultural obstacles make it difficult for both companies to benefit the highest way from mergers or acquisitions. Therefore, the cultural distinctions between Chinese investors and foreign target firms are the major problem in this context (Deloitte, 2011). The strategy to manage this issue includes a specific cultural due diligence, hiring employees who are experienced in both cultures, accept local business manners and maintain a constant exchange of information between both parties (Deloitte, 2011). In addition, Chinese firms with only little expertise in CBM&A should consult professional help like financial, tax, legal or labour service providers (Deloitte, 2011).
2.1.4 Performance Measurement in CBM&A
In the research of M&A performance measurement it is complicated to evaluate the benefits (Hunt, 1988; Cartwright & Cooper, 1993a) and there is no general accordance about the relationship between the company performance and M&A (Larsson & Finkelstein, 1999). In terms of value creation, several studies prove that M&A are not necessarily the reason for positive outcomes and they further state that the failure rate lies in the scope from 44 to 50 percent (Datta et al., 1992; Cartwright & Schoenberg, 2006). Angwin (2007) even prove that the failure rate of acquiring firms ranges between 45 and 82 percent. Regarding these numbers and the high potential of failure, the question arise why companies still expand into foreign countries. The answer for this question is reasoned by the strong need and ambition to expand their businesses (Gaughan, 2002).
The measurement of (CB)M&A performance can be separated into three major methods. The stock market performance-based and the accounting-based performance measures use data to evaluate potential outcomes whereas the socio-cultural integration outcome measure refers to soft factors (Chatterjee et al., 1992; Datta et al., 1992; Stahl & Voigt, 2004a). The data-based performance measurements are based on finance and industrial organization economy literature (Das & Kapil, 2012). The stock-market performance measure calculates the abnormal returns based on the daily stock prices at the event date and in the periods before and after the CBM&A announcement (Seth, 1990; Chatterjee et al., 1992). However, the accounting-based performance measure compares the pre- and post-acquisition performance in terms of sales growth or other key performance indicators (KPI) to calculate potential synergy effects (Datta et al., 1992; Tichy, 2001; Faulkner et al., 2012). The usage of this measurement generates limitations because pre- and post-analyses create problems if the target company is very small relative to the acquirer which would cause no clear financial effects due to size differences (Das & Kapil, 2012). Furthermore, these methods do not present insights into reasons why high rates of failure exist or which factors directly influence the performance (Shleifer & Summers, 1988; Schweiger & Walsh, 1990). A potential cause for the high failure rates could be the cultural fit or the firm relatedness, which are only sparsely considered in recent studies. The third method to examine the outcomes of M&A is focused on soft factors like managerial commitment, acculturation process or human resistance as benchmark for the acquisition success (Stahl & Voigt, 2004a). This concept is not well-established as an adequate performance measure in M&A, but it points out the aspect and importance of soft factors in performance measurement (Stahl & Voigt, 2004a).
measurements focus on aspects of integration effectiveness and synergy awareness, whereas the objective measurements target financial outcome such as share price and accounting performance. The period under observation differs between short-term (e.g., time around the M&A announcement) and long-term (long-run integration effects) (Das & Kapil, 2012). Concerning the high rate of failure, Epstein (2005) states that the M&A measurement should go beyond the financial performance analysis and consider the long-term evaluation of strategy and visions achievement. Additionally, cultural differences can be responsible for underperformance due to a missing cultural fit between the involved companies (Cartwright, 1998) and these differences are highly related to socio-cultural results (Stahl & Voigt, 2004b). Finally, there is a common understanding that financial, legal and strategic motives boost most CBM&A, but the overcoming of cultural problems decides over success or failure (Appelbaum, Roberts & Shapiro, 2013).
2.2 Cultural Distance
The following two sections discuss the cultural dimensions of Hofstede and the national cultural differences, which build the foundation for the analysis of their effects on CBM&A.
2.2.1 Cultural Dimensions of Hofstede
The research area in intercultural management is mainly characterised by the work of Hofstede (1980). The concept of Hofstede is developed by an international study which focuses on the influence of culture and represents the most extensive study in cross-cultural research. The results of Hofstede’s research are quantitative theories which describes culture as a system of shared values and beliefs. Furthermore, Hofstede developed a concept to explicate differences between cultures of countries. The findings of Hofstede show the importance to examine these cultural differences by comparing cultures on four key dimensions. The cultural dimensions mirror the preference of one situation over another and distinguishes the culture of countries from each other. This concept reflects a multi-dimensional perspective of culture and emphasizes the value orientation of each dimension. The scores for each dimension of a country range from 0 to 100, where high scores mean a high tendency towards the observed dimension.
The work of Hofstede differentiates between the following four dimensions of culture: 1) individualism (IDV) versus collectivism, 2) masculinity (MAS) versus femininity, 3) power distance (PDI) and 4) uncertainty avoidance (UAV).
evaluation of this study verify the four dimensions of culture. In later research, Hofstede discovered and added two more dimensions to the national culture framework: 5) long-term orientation (LTO) versus short-term orientation and 6) indulgence (IND) versus restraint. The study of Hofstede presents an important contribution to national culture research, but it provokes academic criticism. One of the well-known critics of Hofstede’s cultural concept is McSweeney, who faults that the model treats nations as a homogeneous cultural territory without differentiating smaller clusters. McSweeney argues that nations are very abstract constructs that contains different cultural sub-groups on a deeper investigation. Moreover, McSweeney discusses that humans not only belong to one particular nation but that they reflect various facets of mental programming, which could descend from religion, gender, ethnic group or social stratum. The critique of McSweeney undermine the national culture concept of Hofstede, but nevertheless it provides a comprehensive understanding of cultural differences and is guiding for the entire research area of intercultural management.
2.2.2 National Cultural Distance
The term of national culture is defined by Hofstede (1980) as “the collective programming of the mind which distinguishes members of one human group from another” (p. 21). Therefore, the national culture distance states how cultural norms and values differ between two countries (Kogut & Singh, 1988). The national culture can be further described as a common understanding of how people interact in their social groups and how these groups differ from each other (Ronen & Shenkar, 2013). Kogut and Singh (1988) mentioned that norms, routines, and repertoires of organizations get affected by cultural distance. The concept of national culture is highly important in a management context, because it influence the political, psychological and sociological areas (Hofstede, 1983).
between companies (Buono & Bowditch, 1989). Deriving from this argumentation, shared similarities between management levels of two different companies can increase the possibility of a successful synergy realization (Larsson & Finkelstein, 1999). Moreover, there is an interdependent relationship between corporate and national culture, because latter culture has a great influence on managers which represent and shape corporations (Weber et al., 1996).
2.3 Firm Relatedness
The concept of firm relatedness defines the relationship between the Chinese acquiring firms and foreign target firms. This relationship is based on the Standard Industrial Classification (SIC) code, which classifies industries by a four-digit code. Section 3.2 and Appendix D provide a detailed explanation of the SIC code system.
2.4 Wealth Effects and the Impact of Cultural Differences and Firm Relatedness
The aim of this study is to examine the shareholder wealth effects of Chinese acquiring companies in CBM&A and examine the impact of cultural distance and the degree of firm relatedness on such effects. The following section discusses this issue and provides three hypotheses.
The reason behind international investment results from the strategy to expand to foreign countries and increase the firms’ growth which is triggered by the continuing globalization. Therefore, CBM&A could be seen as a more favourable strategy compared to domestic M&A in terms of raising profitability and improve managerial deficits (Ahern et al., 2015). Moreover, mergers and acquisitions itself and especially in an international context could be used to gain new business specific knowledge. Following this purpose, two companies from different countries can create more value for the acquirer in comparison to those companies which have only a few norms and values in common (Lubatkin, 1983).
Another argument for positive effects of CBM&A on the shareholder value creation is the access to and exchange of a broad set of routines and repertoires which are based on the specific corporate cultures of each company (Morosini et al., 1998). This concept is based on a complementary understanding of synergetic effects (Morosini et al., 1998, Larsson & Risberg, 1998). Concluding this argumentation of positive effects of CBM&A, the combination of advantages from both companies can be seen as a positive relationship relating to the resource-based view (Barney, 1991).
The research stream on the performance of Chinese CBM&A is constantly growing due to the increase in relevance and acquisitions of Chinese companies worldwide (Zhu & Zhu, 2016). The bottom line and general tendency of the recent literature provides evidence for significant positive wealth effects for Chinese acquiring companies (Wu et al., 2016). These positives effects are explained by strengths in M&A experience and research and development capabilities on the acquirers’ side (Wu et al., 2016). The Chinese M&A research focuses on a broad range of factors which influence the investment outcomes (e.g., institutional distance, corporate governance or organizational learning) (Zhu & Zhu, 2016). This is reflected in Hypothesis 1:
The following paragraphs discuss in detail the three possible outcomes regarding the effects of cultural distance on CBM&A and provide the hypothesis of this study resulting from previous academic research.
There is a high attention in research on the performance of M&A, respectively CBM&A, but there is no universal consensus of key influence factors which create or destroy value (Ellis, Reus & Lamont, 2009). The academic research shows mixed results concerning the effects of cultural differences on CBM&A (Weber, 1996; Morosini et al., 1998; Stahl & Voigt, 2004a). The inconsistent findings by previous literature showed that there is a difficult relationship between the impact of cultural differences on CBM&A performance (Teerikangas & Very, 2006). Teerikangas & Very (2006) state that this inconsistency could be caused by the complexity of the cultural concept itself because it combines different perspectives (e.g., national and organizational culture) which are interrelated. The authors further argue that there is no constant effect of national cultural differences on the different and dynamic stages of CBM&A.
The processes of target evaluation, due diligence, deal negotiation right up to integration are directly affected by cultural differences (Slangen, 2006). Additionally, the culture-performance ratio is influenced by the concepts of double-layered acculturation or liability of foreignness as mentioned in the foregone sections. The research of Stahl & Voigt (2008) underlines the inconsistency in literature and states that the complex culture-performance ratio is composed of different cultural perspectives (national or organizational), performance indicators (stock market-based and accounting-based measures) and corporations studied (target or acquiring firm).
The cooperation between management levels with different cultural backgrounds of the involved companies has been explained and described as key challenge and potential source of failure (Björkman, Stahl & Vaara, 2007). In the context of CBM&A, national culture directly affects the processes during the merger, the post-merger integration and the final result of the acquisition (Weber, 1996; Stahl & Voigt, 2008). This influence is caused by cultural gaps between the individuals involved and can result in different understandings and inefficient cooperation’s (Nahavandi & Malekzadeh, 1988; Cartwright & Cooper, 1996) which have a negative influence on the CBM&A performance.
differences can be accountable for misunderstandings and clashes in CBM&A and they represent a major obstacle for the overall success in mergers and acquisitions (Lodorfos & Boateng, 2006).
According to the negative effects of cultural distance mentioned in the previous paragraph, there are other studies which have mixed findings on the culture-performance relationship. Especially in the context of culture and M&As, which are both highly complex, it is difficult to obtain universal valid results. The connection between cultural fit, financial performance, individual management aspects and change in autonomy is extremely complicated and hampers the quest for clear results (Weber, 1996).
On the other side, the research of Very et al. (1996) state the argumentation of positive wealth effects and ascribe cultural differences the ability to increase the attractiveness of transnational investments. Moreover, some scholars state that a larger cultural distance lead to a better CBM&A performance in the long-run compared to acquisitions in a similar cultural context (Chakrabarti, Gupta-Mukherjee & Jayaraman, 2009). The cultural gap between companies can also lead to a positive performance if the involved parties are particularly focused on the synergy realization instead of the associated costs of the integration (Shimizu et al., 2004; Stahl & Voigt, 2008; Chakrabarti et al., 2009). Furthermore, cultural distance contains an enriching effect if companies from different cultural countries are involved in CBM&As, which is based on the learning perspective introduced by Morosini et al. (1998).
The previous paragraphs discussed the academic findings in research on the effects of cultural differences on CBM&A performance. The literature provides positive (e.g., Morosini et al., 1998), negative (e.g., Slangen, 2006) and inconclusive results (e.g., Teerikangas & Very, 2006). In summary, the scholars Reus & Lamont (2009) describe cultural distance as a “double-edged sword” concerning the effects on acquisition performance. Nevertheless, as argued in literature, the negative effects of cultural distance on CBM&A predominate the advantages for the wealth effects of acquiring firms. This is reflected in Hypothesis 2.
Hypothesis 2: Shareholder wealth effects of Chinese acquiring firms in cross-border acquisitions will be lower when cultural distance is high.
the relationship between the acquirer and target company (Stahl & Voigt, 2004a). The firm relatedness regulates the inter-firm connection, integration process, preserved autonomy and change in the target company (Pitkethly, Faulkner & Child, 2003). The strategy behind most CBM&A is driven by the need of diversification and growth which requires the entry in new markets. In this context, the degree of relatedness plays an important role because the diversification can be achieved in related or unrelated markets to acquire new resources and gain crucial expertise (Chaterjee et al., 1992; Larsson & Finkelstein, 1999). The degree of relatedness is an appropriate influencer of the CBM&A performance. This is reflected in Hypotheses 3:
3. DATA AND METHODOLOGY
This chapter will discuss the data and methodology of this study. Section 3.1 presents the chosen sample. Section 3.2 defines the variables and describes the measurement of those used to test the hypotheses. In the last section, the empirical model is discussed.
3.1 Sample
The data collection for the analysis was provided by the database Zephyr, which is preferred to study M&A deals (Ma et al., 2009). The period of observation was between January 2012 and December 2017. Further restrictions of data set include: 1) The acquirers were public listed firms at a Chinese stock exchange. 2) The target firms were located outside China. 3) The percentage of shares acquired reached or exceeded at the minimum 50 percent of the overall shares available. 4) The transaction was completed. Hence, the final data set used in this study covered 149 deals of Chinese investments into 28 countries.
3.2 Data
The test of the hypotheses required the calculation of the abnormal returns (AR) and cumulative abnormal returns (CAR), based on the event study methodology, for the Chinese acquirers for each deal in the sample. The event study was used to measure the effect of an event on stock returns. Further, the cultural distance between the acquiring and target firm’s country was determined. Lastly, the business relatedness between both parties was obtained by the comparison of the Standard Industrial Classification (SIC) codes.
Abnormal Returns
𝑡2 = -30 to day 𝑡3 = 30 around the announcement date of the acquisition. The expected returns were calculated within the estimation window and represented the average return in the defined period of 150 days. This period started with day 𝑡0 = -180 and ended with day 𝑡1 = -31 before the acquisition announcement. Figure 1 shows the estimation and event windows for the event study.
Figure 1: Event Study – Estimation and Event Window
The calculation of the AR is required for every Chinese acquiring company. The calculation refers to the comparison period mean adjusted model which is represented by the following formula.
𝐴𝑅𝑖𝑡 = 𝑅𝑖𝑡 − 𝑅̅ 𝑖 where,
𝐴𝑅𝑖𝑡 = Abnormal return of firm “i” on day “t” 𝑅𝑖𝑡 = Return of firm “i” on day “t”
𝑅̅ 𝑖 = Average return of the firm “i” in the estimation period, 1
𝑡1−𝑡0∑𝑡∈|𝑡0,𝑡1|𝑅𝑖𝑡
𝐶𝐴𝑅 𝐼𝑖 = Σ𝐴𝑅𝑖𝑡 where,
𝐶𝐴𝑅 𝐼𝑖 = Cumulative abnormal return of firm “i”, in the period (-30; -1) 𝐴𝑅𝑖𝑡 = Abnormal return of firm “i” on day “t”, in the period (-30; -1)
𝐶𝐴𝑅 𝐼𝐼𝑖 = Σ𝐴𝑅𝑖𝑡
where,
𝐶𝐴𝑅 𝐼𝐼𝑖 = Cumulative abnormal return of firm “i”, in the period (0; +30) 𝐴𝑅𝑖𝑡 = Abnormal return of firm “i” on day “t”, in the period (0; +30)
The CAR I and CAR II values were calculated for the two data samples and the market reference group, which is discussed in section 3.3. The market reference group is represented by the CSI 300 index, which reflects the performance of the top 300 stocks traded at the Shenzhen and Shanghai stock exchanges and covers the most important Chinese companies.
Cultural Distance
The following four dimensions to measure national cultural differences between China and the acquired firm country were used: power distance, individualism/collectivism, masculinity/femininity and uncertainty avoidance (Hofstede, 1980). Following the model of Kogut and Singh (1988), the index of national cultural differences was used to calculate the aggregated national cultural distance score of two countries. This index refers to the varieties in each dimension of Hofstede’s country scores and can be calculated as follows:
𝐶𝐷𝑗 = ∑{(𝐼𝑖𝑗− 𝐼𝑖𝑐) 2 /𝑉𝑖} 4 4 𝑖=1 where,
𝐶𝐷𝑗 = Cultural distance of the 𝑗𝑡ℎ acquired firm country from China
𝐼𝑖𝑗 = Index of the 𝑖𝑡ℎ cultural dimension and 𝑗𝑡ℎ country at time “t”
𝐼𝑖𝑐 = Index of the 𝑖𝑡ℎ cultural dimension and China at time “t”
The countries with a low score in cultural distance (𝐶𝐷) were similar to China while a higher score represented significant dissimilarity (Datta & Puia, 1995). The data for each cultural dimension was obtained from the study of Hofstede (1980). The data sample included 100 investments into countries with a high and 49 investments with a low cultural distance to China. The cultural distance scores of all countries involved in this study are presented in Appendix C.
Firm Relatedness
The most common method to assess the degree of relatedness relies on SIC codes, based on the industry similarity of the acquiring and target firms. The SIC code system was used to classify industries by a four-digit code. This system defines 11 different industries (e.g. construction, retail trade or manufacturing). This study categorizes the firm relatedness referring to the presented SIC code system in Appendix D. Acquiring and target firms are related if their four-digit codes are located in the same industry classification. The relationship between both firms was stated as unrelated, if there was no congruence between the industry sectors. Related firms were coded with 1 and unrelated firms with 0. Appendix D further provides an example of the determination of the firm relatedness. The data sample includes 90 related and 59 unrelated CBM&A. Appendix D shows the Standard Industrial Classification system and the classification of the acquiring and target firms in this data sample. In general, about half of the target firms and more than half of the acquiring firms were in the industry sector manufacturing. Hence, the industry dummy for the regression analysis was coded as 1 if the acquiring firm was in construction and 0 if the acquiring firm was in a different sector.
3.3 Empirical Model
This section explains the approach how the hypotheses were tested. Firstly, a paired samples t-test was used to examine potential significant differences between the cumulative abnormal returns before (CAR I) and after (CAR II) the CBM&A announcement. Secondly, a multiple linear regression analysis investigates the relationship between the dependent variable
Diff_CAR2 and the independent variables firm relatedness, cultural distance and the industry
sector of the Chinese acquiring firm. The statistics software SPSS (IBM, SPSS 25) was used to conduct both analyses.
after (CAR II) the CBM&A announcement. This test focused on the same dependent variable at two different times and tested the significance of differences regarding the cumulative abnormal returns in the event window. The paired samples t-test was used, as cumulative abnormal return of the same firm was compared over time. The test investigated the outcomes of event-induced volatility changes.
The two samples of the dependent variable in this test were named CAR I and CAR II. The CAR I represents the cumulated abnormal returns before the CBM&A announcement and refers to the period (-30; -1) of the event window. The CAR II represents the cumulated abnormal returns after the CBM&A announcement and refers to the period (0; +30) of the event window. This test was used to examine Hypothesis 1, which states that CBM&A will have a positive effect on the stock market performance of Chinese acquiring firms. Therefore, the following null hypothesis (𝐻0) and alternative hypothesis (𝐻1) can be noted for the paired samples t-test. These hypotheses provide evidence whether the two samples are significantly different from each other.
𝐻0: 𝜇1= 𝜇2
𝐻1: 𝜇1 ≠ 𝜇2 where,
𝜇1 = the population mean of CAR I 𝜇2 = the population mean of CAR II
𝑡 =𝑥̅𝑑𝑖𝑓𝑓 𝑠𝑥̅ where, 𝑠𝑥̅ =𝑠𝑑𝑖𝑓𝑓 √𝑛 where,
t = t-value of the paired samples t-test 𝑥̅𝑑𝑖𝑓𝑓 = Sample mean of the differences 𝑠𝑥̅ = Estimated standard error of the mean
𝑠𝑑𝑖𝑓𝑓 = Sample standard deviation of the differences
𝑛 = Sample size
Following the paired samples t-test, a multiple regression analysis to examine hypotheses 2 and 3 was conducted using SPSS (IBM, SPSS 25). The two hypotheses focus on the effects of cultural distance and firm relatedness on the shareholder wealth effects of Chinese acquirors. The first hypothesis generally examined potential differences between the CARs before and after the CBM&A announcement. The multiple regression analysis took CAR I and
CAR II into consideration. Furthermore, the CAR I and CAR II were calculated for the market
reference group, which is represented by the CSI 300 index. These calculations were conducted for each company. Afterwards, the difference between CAR I and CAR II for the data sample and market reference group was calculated subsequently. The difference between CAR I and
CAR II was defined as CAR2. Following this calculation, the study provided the CAR2 for the
data sample and the CAR2 for the market reference group. Both CAR2 values were calculated for each observation in the data sample. Following this, the difference between the CAR2 of the data sample and the CAR2 of the market reference group was defined as Diff_CAR2. This value represents the dependent variable of the multiple regression analysis. The following section will briefly describe the calculation of CAR2 and Diff_CAR2.
The 𝐶𝐴𝑅2𝑖𝑡 for the data sample was obtained by the following equation:
𝐶𝐴𝑅2𝑖𝑡 = 𝐶𝐴𝑅 𝐼𝐼𝑖𝑡 − 𝐶𝐴𝑅 𝐼𝑖𝑡 where,
𝐶𝐴𝑅2𝑖𝑡 = Cumulative abnormal returns of firm “i” at time “t” (0; +30) minus
cumulative abnormal returns at time “t” (-30; -1)
𝐶𝐴𝑅 𝐼𝑖𝑡 = Cumulative abnormal returns of firm “i” at time “t” (-30; -1) before the CBM&A announcement
𝐶𝐴𝑅 𝐼𝐼𝑖𝑡 = Cumulative abnormal returns of firm “i” at time “t” (0; +30) after the CBM&A announcement
The 𝐶𝐴𝑅2𝑚𝑡 for the market reference group was obtained by the following equation:
𝐶𝐴𝑅2𝑚𝑡 = 𝐶𝐴𝑅 𝐼𝐼𝑚𝑡 − 𝐶𝐴𝑅 𝐼𝑚𝑡
where,
𝐶𝐴𝑅2𝑚𝑡 = Cumulative abnormal returns of market reference group “m” at time “t” (0; +30) minus cumulative abnormal returns at time “t” (-30; -1)
𝐶𝐴𝑅 𝐼𝑚𝑡 = Cumulative abnormal returns of market reference group “m” at time “t” (-30; -1) before the CBM&A announcement
𝐶𝐴𝑅 𝐼𝐼𝑚𝑡 = Cumulative abnormal returns of market reference group “m” at time “t”
(0; +30) after the CBM&A announcement
Following the calculation of 𝐶𝐴𝑅2𝑖𝑡 and 𝐶𝐴𝑅2𝑚𝑡, the difference of both values was
used to examine possible varieties. This comparison was used to integrate the respective time and to ensure that for example an increasing market performance did not distort the model in terms of parallel rising CAR values of companies, which could be caused by positive market development. The difference between both values is expressed in the following formula:
𝐷𝑖𝑓𝑓_𝐶𝐴𝑅2 = 𝐶𝐴𝑅2𝑖𝑡 − 𝐶𝐴𝑅2𝑚𝑡 where,
𝐷𝑖𝑓𝑓_𝐶𝐴𝑅2 = Difference of 𝐶𝐴𝑅2𝑖𝑡 and 𝐶𝐴𝑅2𝑚𝑡
𝐶𝐴𝑅2𝑖𝑡 = Cumulative abnormal returns of firm “i” at time “t”
In order to find relationships among the variables, this study conducted a multiple regression analysis. A regression analysis is a common tool among researchers, in order to find and describe the relationship between variables (Higgins, 2005). The optimal fitting line for this relationship between variables is called regression line and follows the formula of Penders (2016).
As this study used two independent variables and one dependent variable, a multiple regression analysis was conducted. A multiple regression analysis is conducted when the relationships between two or more variables are investigated. In order to conduct a multiple regression analysis, the following assumptions must be fulfilled: 1) Linear relationship: relation between the dependent variable and the independent variables must be linear. 2) Multivariate normality: residuals are normally distributed. 3) No multicollinearity: no high correlation between the independent variables. 4) Homoscedasticity: variance of the population is equally distributed in the dependent variable for each combination of independent variables. Appendix J provides evidence for the homogeneity of variance.
The multiple regression equation included the differences of CAR2 for the data sample and the market reference group, represented by Diff_CAR2. Further, the model considered the degree of relatedness, which was coded binary with 1 for related and 0 for unrelated firms. Additionally, the cultural distance scores between China and the target’s country were included as absolute values.
𝐷𝑖𝑓𝑓_𝐶𝐴𝑅2 = 𝐶 + 𝛽1∗ 𝑅𝐸𝐿𝑖+ 𝛽2∗ 𝐶𝐷𝑖 + 𝛽3∗ 𝐼𝑆𝑖+ 𝜀
where,
𝐷𝑖𝑓𝑓_𝐶𝐴𝑅2 = Difference of 𝐶𝐴𝑅2𝑖𝑡 and 𝐶𝐴𝑅2𝑚𝑡
𝐶 = Constant
𝛽 = Beta coefficient
𝑅𝐸𝐿𝑖 = Firm relatedness of firm “i” 𝐶𝐷𝑖 = Cultural distance score of firm “i”
𝐼𝑆𝑖 = Industry sector of firm “i”
𝜀 = Error term
4. RESULTS
This section presents the results of the statistical analysis. The author first checks for multicollinearity and presents the descriptive statistics in section 4.1. This is followed by the presentation of the paired samples t-test in section 4.2. Afterwards, the author shows the results of the multiple regression analysis in section 4.3.
4.1 Multicollinearity and Descriptive Statistics
Multicollinearity describes the correlation between the independent variables in a multiple regression equation (Wooldridge, 2013). Multicollinearity can be tested by observing the correlation matrix and variance inflation factors (VIF). The VIF indicate if a predictor has a strong linear relationship with other predictors in the model. The threshold for the VIF is a maximum value of 10 and the threshold for the collinearity tolerance level (CTL) is a maximum value of 0.2 (Penders, 2016). According to Farrar and Glauber (1967), high multicollinearity is a threat to the correct specification and the estimation of the variables unique effects that are examined through regression techniques. Appendix E presents the VIF and the highest calculated value is 1.119 with a collinearity tolerance of 0.893 for the independent variable cultural distance. The highest VIF is below the threshold which leads to the conclusion that there is no multicollinearity between the independent variables. Furthermore, this study tests for multicollinearity by observing the correlation matrix. The correlation matrix is presented in Appendix F and shows that no multicollinearity exists. This is proved by the correlation values which do not exceed the threshold of 0.7.
Table 1: Descriptive Statistics
4.2 Paired Samples t-Test
This section presents the calculated ARs and CARs for Chinese firms in CBM&A over the entire event window. Furthermore, the results of the paired samples t-test are presented to show whether the CARs before and after the CBM&A announcement are significantly different from each other or not.
This work focuses on the ARs during the event window (-30; +30) and compares the differences between the periods before the announcement date (-30; -1) and after the announcement date (0; +30). This approach is used to cover all relevant market reactions, which further increases the reliability of the explanatory power. Moreover, the comparison of the periods before and after the event date clarifies possible effects of the CBM&A announcement and provides a more realistic and comprehensive view of the shareholder wealth effects for Chinese acquiring companies. The period (0; +30) after the CBM&A announcement covers the immediate market reactions close to the announcement date of the acquisition, which is on the basis of the assumption that markets immediately adjust to new events and that outright information are accessible (Datta & Puia, 1995).
Table 2 shows the average abnormal returns of all Chinese acquiring firms during the event window on a daily level. Additionally, the cumulative abnormal returns were calculated over the entire timeframe. Both, the average ARs and the CARs are indicated as percentage values. The trend of the CARs is consistently positive during the period of (-30;30). The AR at the event date is negative (-0.23%) and the CARs over the entire event window (-30; +30) reflects a positive development (+12.44%).
Table 2: Abnormal Returns and Cumulative Abnormal Returns for Chinese Firms in
Cross-Border Acquisitions
Table 2 shows the calculated CARs for the sample before and after the CBM&A announcement. The mean for the CARs before the event date is expressed by CAR I and amounts to a positive cumulated return (+6.90%). The mean for the CARs after the event date is expressed by CAR II and presents yielding cumulated return (+5.40%). It is noteworthy that both the CAR I and the CAR II show positive returns based on the stock market performance of the data sample with 149 observations. However, the CARs in the period after the CBM&A announcement are lower than the CARs before this event. Therefore, the two paired samples t-test is conducted to observe if the mean scores of the before mentioned CARs are significantly different from each other.
The results of the paired samples t-test are presented in the following section. The mean difference the CAR I and CAR II was M= .015 with SD= .347. The difference is not significant (t= .514, p= .608). The result implies that the proposed null hypothesis cannot be rejected and there is no significant difference between the two mean scores of CARs before and after the CBM&A announcement. Therefore, hypothesis 1 of this study was not supported.
4.3 Regression Analysis
In this section the results of the regression analysis will be discussed. The interpretation of the multiple regression analysis requires the observation of the regression coefficients and the overall fit of the model. The assessment of the regression coefficients is divided into three steps. Firstly, the significance levels of the regression coefficients have to be assessed. The threshold for significant values is at the 5% level. Secondly, the algebraic sign of the regression
-0.16 0.08 AR (%) CAR (%) -30 -20 6.57 6.65
Event Day AR (%) CAR (%) Event Day
coefficient needs to be evaluated to determine whether the coefficients effects the independent variable in a negative or positive direction. Lastly, the magnitude has to be assessed to examine the strength of the correlation. Following the evaluation of the regression coefficients, the overall fit of the model needs to be analysed. In this context, the value of adjusted R-squared is used. The adjusted R-squared value presents the amount of variance in the dependent variable that is accounted for or explained by the independent variables in the regression equation. Furthermore, the adjusted R-squared takes into consideration the number of independent variables, the degrees of freedom and the sample size. The results of the multiple regression analysis are presented in Table 3.
Table 3: Coefficients
Table 3 includes the independent variables used in the regression equation and presents the coefficients for firm relatedness, cultural distance and industry sector. The coefficient for the variable firm relatedness is .030, which shows that the same industry sector in CBM&A affects Diff_CAR2 positively. However, the coefficient is not significant (t= .545; p= .586). This positive effect is in line with hypothesis 3, but based on the lack of statistical significance, hypothesis 3 cannot be supported. The coefficient for cultural distance is -.029, which states that differences in culture between the acquiring and target firms have a negative effect on
Diff_CAR2. Nevertheless, the coefficient is not significant (t= -1.453; p= .148). This negative
effect of cultural distance corresponds with hypothesis 2, but the missing statistical significance causes that hypothesis 2 cannot be supported. The dummy variable for the industry sector was used to observe whether acquiring firms in the manufacturing sector or those firms in the residual sectors lead to better results of the dependent variable. The coefficient for the industry sector is -.100, which shows that CBM&A of Chinese acquirers which are not in the manufacturing industry result in a lower Diff_CAR2 in comparison to acquiring firms which are
.011
Industry Sector -.100 .059 -1.781 .077
.140
Cultural Distance -.029 .020 -1.453 .148 -.069 .010
.030 .055 .545 .586 -.079
* Significant at the 0.05 level.
Unstandardized Coefficients Upper Bound .210 (Constant) .094 .059 1.599 .112 -.022 95.0% Confidence Interval for B Lower Bound
Model B Std. Error t Sig.
Firm Relatedness
active in the manufacturing sector. However, the coefficient for the industry sector is not significant (t= -1.781; p= .077).
Furthermore, the adjusted R-squared presents the explanatory power of variables. The value for the adjusted R-squared in this model is .027 (Appendix H). This value indicates that 2.7% of the variation in Diff_CAR2 is explained by the independent variables used in this regression model. The adjusted R-squared value leads to the implication that 97.3% of the variation in Diff_CAR2 cannot be explained by the variables used in the regression equation.
5. CONCLUSION
This section provides the discussion of the empirical results. Further, the limitations and recommendations for future research are presented in section 5.2. Finally, section 5.3 concludes.
5.1 Discussion
This study hypothesized that cross-border acquisitions are associated with positive shareholder wealth effects for Chinese acquiring firms. This assumption is presented in hypothesis 1. Moreover, this work examines potential effects of cultural distance and firm relatedness on the value creation for Chinese investors. Hypothesis 2 states, that shareholder wealth effects for acquirors are lower in cross- border acquisitions if there is a high cultural distance between China and the target country. In addition, this work hypothesized that CBM&A within related industries lead to higher returns than in unrelated industry sectors, which is presented in hypothesis 3. This study cannot support the proposed hypothesis 1, hypothesis 2 and hypothesis 3 based on the previous results from statistical analysis. The findings will be critically discussed in the following sections.
First, this study argued that Chinese companies benefit from cross-border acquisitions in terms of higher stock market returns after the announcement of those events. The abnormal returns, which express positive or negative wealth effects for shareholders, were calculated and examined by the paired samples t-test. The comparison of the CARs before and after the event announcement showed that both values are positive. Nevertheless, the CARs of the period after the event day decreased in comparison to the CARs of the period before. The conducted statistical test could not provide evidence for significant differences. Therefore, hypothesis 1 cannot be supported. This result reflects the very heterogenous findings in former research with no consistent results (e.g., Datta, Pinches & Narayan, 1992; King et al., 2004). The uniqueness of M&As in association with multiple factors which influence the outcomes are the main reasons for this result. Nevertheless, the fact that hypothesis 1 cannot be supported and that there is no proof of significant shareholder wealth effects is in contrast to the previous literature of Wu et al. (2016) which provides evidence for positive stock market returns for Chinese acquiring firms.
variable cultural distance stated a negative impact on the shareholder wealth creation for Chinese acquirers, but there was no proof of statistical significance. Therefore, hypothesis 2 cannot be supported. The previous literature which has focused on the effects of cultural distance on the stock market performance showed inconsistent findings as well (Teerikangas & Very, 2006). Former research explained this inconsistency by the complexity of the cultural concept itself (Teerikangas & Very, 2006). However, Datta and Puia (1995) found significant evidence for negative effects of cultural distance. In context of the results concerning the impact of cultural distance, the lack of significance could be caused by the non-significant results of the event study. Further limitations are mentioned in section 5.2.
Third, this study proposed that the stock market return for Chinese acquirers would be higher in related than in unrelated cross-border acquisitions. Hypothesis 3 reflected this proposition and a regression analysis was used to test this hypothesis. The coefficient of this variable indicated a positive impact on the shareholder wealth creation, but there was no statistical evidence for it. Therefore, hypothesis 3 cannot be supported. The data set showed, that 60.4% of all CBM&A are between related companies. This fact underlines that the degree of firm relatedness played an important role in investment decisions (e.g. economies of scale, shared research and development). Previous literature on the effects of firm relatedness supported this statement and defined this variable as a crucial factor in mergers and acquisitions (Stahl & Voigt, 2004a). As already mentioned in the context of cultural distance, the lack of significance could be caused by the non-significant results of the event study.
Lastly, the regression model contained the dummy variable which focused on the industry sector of the Chinese acquiring company. The results showed a negative coefficient for this variable. This result implies that CBM&A of acquiring firms which are active in the manufacturing sector could lead to a higher value for Diff_CAR2. The coefficient for the industry sector is not significant which reduces its explanatory power.
5.2 Limitations and Recommendations for Future Research
performance only at during a personal interaction between employees of the acquiring and target company. These interactions are mostly very rare during the time of the event window. Potential incapability’s in terms of social interaction can lead to performance issues. The consequences of these issues would only reveal at a future point of time. The assessment of those issues would require a qualitative approach in research instead of a quantitative one.
These limitations lead over to the recommendations for future research. Additional research on the effects of CBM&A for the shareholder value creation should focus deeper on the impact of cultural differences. This study showed that there is a distinct but not significant effect of cultural distance, but the predictability of this quantitative study is limited. Further research should use soft factors to for the measurement of CBM&A performance in combination with cultural distance. The socio-cultural integration outcome measure could be used to concentrate exclusively on the role of cultural differences in mergers and acquisitions (Stahl & Voigt, 2004a). Additionally, an integrated approach of quantitative and qualitative research should be applied to consider cultural distance on a more fine-grained level. Lastly, mergers and acquisitions are not a unilateral approach to enter new markets or gain additional knowledge. M&A include always at least one acquiring and one target firm, which leads to the recommendation that further research should consider potential effects for target firms in a combined investigation as well.
5.3 Conclusion
In academic literature has been a lack of research on Chinese CBM&A and the impact of cultural differences and firm relatedness. This study fills this gap by providing detailed results and implications on this issue by the general examination of returns for Chinese acquiring companies and considering the above-mentioned predictors. Furthermore, this work refers to 149 observations in the years from 2012 to 2017, which represent the latest market transactions.
This study combines and pursues two major field of interests, which result from research and economy. On one hand, there is an increase in academic literature on M&A that tries to disclose and explain potential variables which affect the performance of Chinese (CB)M&A (Stahl & Voigt, 2008). On the other hand, the number of Chinese foreign direct investments is increasing since the early 2000s and they become more important over time.
