The Role of Cultural Differences and Investor Protection
on Target Gains from Cross-border Acquisitions
Master thesis 22nd February, 2013
Wenting Shi S2077116
Supervisor: Dr. Halit Gonenc Assessor: Dr. J. H. von Eije
Abstract
The paper examines the announcement returns of targets’ shareholders over the period of 2004 to 2012 in the cross-border acquisitions, and identifies its relationships with cultural differences and investor protection differences respectively. My results show that targets’ shareholders do get significantly positive cumulative abnormal returns around announcements. Targets’ shareholders may obtain higher cumulative abnormal returns if there are greater cultural distances between acquirers and targets, or acquirers come from countries with stronger investor protection environment than targets. This paper adds value to existing literatures with the role of cultural differences and investor protection differences in cross-border acquisitions.
1. Introduction
Although the positive announcement returns to target shareholders have been largely investigated (Leeth and Borg, 2002; Danbolt, 2004; Mulherin and Boone, 2000; Ang and Cheng, 2006), the reason why returns of target firms change accordingly with acquirers’ countries (or regions) remains an important issue for researches on merger and acquisition. Some research pointed out acquiring firms’ intentions, operation and financial situations and other factors might influences wealth effects on targets’ shareholders of cross-border acquisitions. For instance, targets’ shareholders may obtain even higher announcement return and post announcement return if the bid is hostile (Martynova and Renneboog, 2008; Servaes, 1991; Franks and Mayer, 1996). Andrade, Mitchell and Stafford (2001) found that all-cash bids trigger higher abnormal returns to target shareholders than all-equity bids. However, these studies, which investigated financial and strategic variables such as method of payment, acquisition experience, degree of relatedness, fail to significantly explain and predict financial performance of companies engaged in cross-border acquisitions according to King, Dalton, Daily and Covin (2004).
Singh, 1998; Larsson and Finkelstein, 1999; Olie and Verwaal, 2004; Stahl and Volgt, 2008). On the other hand, Rossi and Volpin (2004) found that the majority of target firms engaged in international acquisitions come from those countries with weaker investor protection, while most of the acquirers come from investor friendly countries. Martynova and Renneboog (2008) as well as Bris, Brisley and Caboli (2008)’s research show that returns of acquiring and acquired firms are influenced by differences in the degree of investor protection.
As two major national variables, cultural differences and investor protection differences cover most of investors’ concerns about the obstacles in cross-border acquisitions at a national level. More importantly, Chatterjee Lubatkin, Schweiger and Weber (1992) found that, immediately after an acquisition has been publicly announced, the stock price of a firm reflects significantly the market’s view of potential cultural clash or compatibility between the acquiring and target firms, penalizing or rewarding it accordingly. However, does the stock price of target firm also significantly reflect the market’s view of the difference of investor protection environments between the acquiring and target firms? In the case of positive announcement returns to target shareholders, do cultural differences and investor protection differences between acquiring and target firms increase or decrease the positive announcements effects of cross-border acquisitions to target firms?
In order to improve my understanding of cross-border acquisitions outcomes, it is interesting and imperative to look at the effects of both cultural differences and investor protection. Unfortunately, cultural differences and investor protection have so far been mostly researched in isolation of each other. For this purpose, this paper takes cross-border acquisitions announced in the period of 2004-2012 as a sample, to investigate cumulative abnormal returns to targets’ shareholders, and its relationships with cultural differences and investor protection differences respectively.
with larger cultural distances to the acquirers may obtain higher cumulative abnormal returns than those with smaller cultural distances.Andtarget firms would obtain higher cumulative abnormal returns around announcements of cross-border acquisitions if acquiring firms come from countries with stronger investor protection environment than target firms.Furthermore, when I subdivide my sample by the level of cultural distance and investor protection differences between acquiring and target firms, I find that, for small cultural distance between the acquiring and target firms, the target firms will obtain even much higher cumulative abnormal returns around announcements of cross-border acquisitions if the acquiring firms come from countries with stronger investor protection. For the target firms coming from country with stronger investor protection than the acquirers, greater national cultural distance between the acquirer and target firms will bring much higher cumulative abnormal returns to target shareholders around announcements of cross-border acquisitions.
This paper contributes to literatures on cross-border acquisitions because it provides new evidence in the period of 2004-2012 on targets’ cumulative abnormal returns in the research of cross-border acquisitions. Moreover, the study of cultural differences and investor protection differences in cross-border acquisitions is un-reached before and provides new understanding into whether investors react to cross-border acquisitions differently based on the level of cultural differences and investor protection differences between acquiring and target firms.
The remainder of this paper is structured as follows. Section 2 contains the literature background and develops the hypotheses for my study. Section 3 presents the data and methodology. Section 4 reports the results of my study. Section 5 has the summary and conclusion.
2. Literature Review and Hypothesis
empirical evidences about announcement return for target firms in cross-border acquisitions are presented. The second part presents previous theories and empirical studies, which focus on the effect of national cultural differences on announcement return in cross-border acquisitions. The third part presents previous studies that examined if different investor protection environments have influenced targets’ announcement return in cross-border acquisitions.
2.1 Wealth effects of Cross-border acquisition
Does cross-border acquisition create or destroy acquirers’ shareholder value? The conclusions are mixed. Some scholars believe that cross-border acquisitions might improve the rapid exploitation of growth opportunities in foreign markets (Seth, Song and Pettit, 2000) and strengthen competitiveness of the acquiring firms (Chari, Ouimet and Tesar, 2004; Graham, Martey and Yawson, 2008). The acquirer also could gain from taking advantage of financial markets imperfections by international acquisitions (Kindleberger, 1969; Hymer, 1976; Kohli and Mann; 2012). Especially in emerging countries, stock prices may not accurately reflect true firm values. The additional asymmetric information in emerging markets facilitates bidders to attain intangible price discount and potentially benefit from it (Eije and Wiegerinck, 2010).
Moreover, herding theory as another perspective of agency problem demonstrated by Martynova and Renneboog (2008) in their article could be another explanation for value destroying merger and acquisitions. They explained, “Herding predicts that firms tend to mimic the actions of a leader”. Firms may engage in international acquisitions just for the purpose of mimicking the leader who undertook the first successful takeover rather than take action based on companies’ strategic consideration.
The third aspect of agency problem, presented by Shleifer and Vishny (1991), could be the personal objectives of corporate managers. Graham et al (2008) mentioned the tendency of managers to operate the companies to satisfy their personal ambitions, which is actually the same idea in Shleifer and Vishny (1991). For instance, managers pursue international diversification for the purposes of self-satisfaction (Graham et al, 2008) and protecting their own positions (Amihud and Lev, 1981).
Last but not least, Jensen (1986)’s free cash flow theory also amplifies the research of agency problems regarding merger and acquisitions. He argues self-interested managers in firms with high free cash flows have the propensity to waste money on unbeneficial acquisitions.
From the perspective of geographic diversification, cross-border acquisitions may destroy value as well. Rondinelli, Rosen and Drori (2001) argue that cross-border acquisitions might bring more difficulties to management due to geographic diversification. For instance, companies are likely to spend more money and time on cross-border acquisitions because of differences between culture, local institutions and politics (Eije and Wiegerinck, 2010; Conn, Cosh and Guest, 2005). Moreover, imperfect information may make it more difficult to accurately value foreign targets and finally leads to low returns in cross-border acquisitions compared with domestic acquisitions (Conn et al, 2005).
value increasing brought by cross-border acquisitions. First of all, target firms could profit from synergies generated through cross-border acquisitions, because internalization by geographic diversification permits the exploitation of economies of scale and scope, especially in acquirers’ intangible and information based assets such as brand name, technical knowledge and so on (Doukas and Travlos, 1988; Montgomery and Wernerfelt, 1988; Baldwin and Caces, 1991; Morck and Yeung, 2003; Chen and Zeng, 2004; Conn et al, 2005). Moreover, cross-border acquisitions could enable target companies to benefit from differences in tax systems (Servaes and Zenner, 1994), law, regulation and enforcement (Rossi and Volpin, 2004).
Second of all, targets’ shareholders may obtain even higher announcement return and post announcement return if the bid is hostile (Martynova and Renneboog, 2008; Servaes, 1991; Franks and Mayer, 1996). The reason is that acquirers tend to offer higher premiums in hostile acquisitions than in friendly acquisitions. Further, share prices of the target firms may immediately increase due to the expectations of investors that the offer price may be upward revised because of those oppositions to this bid.
Third of all, cash bids trigger higher abnormal returns to target shareholders than all-equity bids (Andrade et al, 2001). It could be explained that all-cash bids may give a signal of good operation and financial situation of acquiring firms, which may lead to positive reaction in target markets.
Table 1
Empirical evidences of announcement effect on target shareholder value
Literature, Sample country Sample Period
Leeth and Borg (2002), US 1919–30
Dodd and Ruback (1977), US 1958–78
Kummer and Hoffmeister (1978), US 1956–74
Bradley (1980) and Bradley and Jarrell (1980), US
1962–77
Dodd (1980), US 1970–77
Asquith (1983), US 1962–76
Eckbo (1983), US 1963–78
Asquith, Bruner and Mullins (1983), US 1963–79
Malatesta (1983), US 1969–74
Dennis and McConnell (1986), US 1962–80
Lang, Stulz and Walkling (1989), US 1968–86
Chatterjee (1992), US 1963–86
Franks, Broyles and Hecht (1977), UK 1955–72
Firth (1980), UK 1969–75
Franks and Harris (1989), UK 1955–85
Eckbo and Langohr (1989), France 1966–82
Franks, Harris and Titman (1991), US 1975–84
Servaes (1991), US 1972–87
Kaplan and Weisbach (1992), US 1971–82
Healy, Palepu and Ruback (1992), US 1979–84
Schwert (1996), US 1975–91
Maquiera, Megginson and Nail (1998), US 1977–96
Graham, Lemmon and Wolf (2002), US 1980–95
Franks and Mayer (1996), UK 1985–86
Higson and Elliott (1998), UK 1975–90
Danbolt (2004), UK 1986–91
Mulherin and Boone (2000), US 1990–99
Ang and Cheng (2006), US 1984–01
Raj and Forsyth (2003), UK 1990–98
Goergen and Renneboog (2004), Europe 1993–01
Campa and Hernando (2004), EU 1998–00
Martynova and Renneboog (2006), Europe 1993–01
Holmen and Knopf (2004), Sweden 1985–95
Compiled by author
In sum, it can be concluded that targets’ shareholders profit from cross-border acquisitions around the bid announcements. But acquiring firms’ intentions, operation and financial situations and other factors might influence wealth effects on targets’ shareholders of cross-border acquisitions. Therefore, my first hypothesis is:
H1: Cumulative abnormal returns to targets around announcements of cross-border
acquisitions will be positive.
2.2 Cross-border acquisition and cultural differences
explain and predict financial performance of companies engaged in merger and acquisition activity. Therefore, in recent years, scholars are trying to excavate new factors and developing new theoretical frameworks to better understand the success and failure of merger and acquisitions. Cultural difference is gradually catching attentions of researchers in the field of takeover activity. The role of cultural factor has been widely studied in the form of cultural fit (Weber, 1996), cultural distance (Morosini et al, 1998), acculturation (Larsson and Lubatkin, 2001) and so on.
As yet, arguments of theoretical studies are not unanimous. The most prevalent theory is Hofstede (1980) cultural distance hypothesis, “the difficulties, costs, and risks associated with cross- cultural contact increase with growing cultural differences between two individuals, groups, or organizations”. This notion is consistent with acquisition cultural risk presented by David and Singh (1994). Acquisition cultural risk theory points out the national cultural differences, organizational cultural differences and differences of employees’ cultural background would result in the lack of communication and understanding among organization members, thereby generating potential threat to post-acquisition integration.
Ahern et al. (2012) found that cultural distance in individualism and trust leads to lower combined announcement returns of acquirers and targets and lower synergy gains.
The opposite view of the role of cultural differences in acquisition activity is based on organizational learning theory. It suggests that cultural diversity between acquirers and target firms may create opportunities for learning and knowledge developing. Cultural differences could increase the likelihood of different knowledge stocks in the acquiring firm and the acquired firm. The acquiring firm and the acquired firm are likely to offer increased potential for synergies and knowledge transfer because they are likely to be less duplicative and more complementary if their knowledge stocks differ.
Furthermore, resource based theory explains the positive effect of cultural differences from a different angle. Companies could gain the access to unique knowledge and potentially valuable competences that are rooted in a dissimilar cultural environment and then achieve a competitive advantage (Morosini et al, 1998; Larsson and Finkelstein, 1999; Olie and Verwaal, 2004; Stahl and Volgt, 2008).
However, it is important to point out that it is not a linear relation between the effects of cultural diversity and combination potential of acquisitions. Birkinshaw, Bresman and Håkanson (2000) found in their research of Swedish multinational companies, that mutual respect and trust play a crucial role in promoting resource sharing and capability transfer, while Morosini (2005) found that sense of share identity help facilitating capabilities transfer in merger and acquisitions. But the positive effects of cultural distance such as unique capabilities transfer, knowledge and resource sharing may be diminished by the likelihood increase of implementation and integration problems caused by greater cultural distance (Björkman, Stahl and Vaara, 2007).
shareholder value than are organizational cultural differences”. Other studies also suggest the same idea. For example, Evans, Pucik and Barsoux (2002) found that managers involved in merger and acquisitions are more attentive to critical cultural issues. Very, Lubatkin and Calori (1996) observed that national cultural differences might become attractive rather than stressful, depending on nationalities of the acquirer and the target firm. Goulet and Schweiger (2006) argued that partners involved in international merger and acquisitions tend to pay more attention to national cultural distance. Consist with this logic, companies, which are involved in cross-border acquisitions in unfamiliar cultural environments, are exposed to various kinds of ideas, management styles, and routines. Thus, national cultural differences can help companies to trigger new solutions, stimulate innovation, and develop knowledge and technological skills (Larsson and Finkelstein 1999; Olie and Verwaal, 2004; Stahl and Voigt, 2008). As suggested by these arguments, my second hypothesis is:
H2: Greater national cultural differences lead to higher targets’ cumulative abnormal
return around the announcement of cross-border merger and acquisitions. 2.3 Cross-border acquisition and Investor Protection
Since La Porta, Lopez-de-Silanes, Shliefer and Vishhy (1998, henceforth LLSV) presented the relationship between investor protection and financial capital market, the implications of different investor protection mechanisms are increasingly incorporated in various of studies. Several scholars have linked different aspects of investor protection with merger and acquisitions in their studies. But the evidences on wealth effects of announcements on target shareholders are limited.
target firms in countries with weak investor protection at lower price because ownership may be more concentrated in lower investor protection countries. In other words, takeover activity may be tougher to execute in countries with strong investor protection due to their less concentrated ownership.
Based on this theory, Anderson, Marshall and Wales (2009) studied the relationship between investor protection legislation and cumulative abnormal return of target shareholders within Europe. The result is consistent with LLSV. They found target firms in countries with strong investor protection achieve higher announcement and post-announcement return because their greater bargaining power forced bidders to offer larger premiums.
But in the paper of Anderson et al (2009), they point out there is a possibility for target firms in low investor protection countries to earn larger announcement return. The reason they proposed is that wealth is more likely to be appropriated by management in weak investor protection countries, which implies “lower demand for shares in these countries and this in turn leads to lower valuations”. And the lower valuations may allow acquiring firms still extract adequate synergistic gains from the takeover even they make higher offers.
Similarly, Bris and Cabolis (2008) observed this phenomenon when they analyzed worldwide merger and acquisitions from 1989 to 2002. They found that target firms in countries with weaker investor protection get higher premium in cross-border merger and acquisitions compared with domestic merger and acquisitions. They put this down to the ownership structure of target firms. Specifically, they argued that target firms with more concentrated ownership structure in weak legal environment tend to request higher prices for their shares.
higher if acquiring firms come from weaker legal environments. The higher premiums are based on the reason that acquiring firms with weaker shareholder protection tend to offer high price in order to compensate shareholders from target firms for reductions in shareholder protection in the future.
On the contrary, Kuipers, Miller and Patel (2009) investigated both acquirer and targets’ abnormal returns with the sample of US public target companies in the period 1982-1991. The results showed that targets’ returns are higher if acquiring firms come from countries with the strong law enforcement and high degree of creditor protections. In other words, strong investor protection environment of acquirers’ countries could be a significant factor in explaining wealth effects of cross-border acquisitions on target shareholders. Overall, some literatures investigate wealth effects of cross-border acquisitions to target shareholders by analyzing level of investor protection of targets’ countries, while others investigate it by analyzing level of investor protection of acquirers’ countries. After reviewing these literatures, I argue that target firms gain higher announcement returns if acquiring firms come from countries with weak investor protection. Therefore, my third hypothesis is
H3: If acquiring firms come from countries with weaker investor protection than target
firms, target firms will obtain higher cumulative abnormal returns around announcements of cross-border merger and acquisitions.
3. Data and Methodology
3.1 Sample description
Cross-border acquisitions become increasingly prevalent and bigger than ever before (Conn et al, 2005). Martynova and Renneboog (2008) identify six waves in a century of corporate takeovers. They found, since mid-2003, takeover activity has again boomed in Europe, US and Asia because of the gradual recovery of financial and economic markets after the downturn in 2000. Based on this fact, the sixth wave1 is defined the period 2003
to present. And in most of empirical studies regardless of the size of their sample, researches of takeover activity after 2003 are rare. Therefore, the sample set of this study would start from 2004 to 2012 in order to provide new empirical evidence on takeover activity of sixth wave. The unit of observation investigated is public firms listed in New York Stock Exchange, London Stock Exchange and Hong Kong Stock Exchange.
The sample source of this study comes from Zephyr Database of Bureau Van Dijk, which covers M&A, IPO and venture deals on a globe scale. The deals that fulfill the following requirements are included to further analysis:
1. Time period is 2004-2012.
2.The transaction should be cross-border acquisitions.
3. Target firms should be mainly2 listed in New York Stock Exchange, London Stock Exchange and Hong Kong Stock Exchange.
4. The deal should include only one acquiring firm.
5. The acquiring firms and target firms are not from Virgin Island, Bermuda and Cayman Islands3.
6. The nationality of acquiring firms and target firms must have the score information in Hofstede’s cultural index4 and anti self-dealing index5.
7. The important data of each deal (country code of acquiring and target firms, deal status, deal value, deal method of payment, major sector of acquiring and target firms) should be available in Zephyr database.
After criteria search, I obtain 91 deals of cross-border acquisitions available from Zephyr database. The data contain names of acquiring and target firms, country code of acquiring and target firms, announcement date of each deal, deal value, deal status, major sector of acquiring and target firms, target firms’ ISIN number, target stock index information and so on.
2 Some public companies are cross-listed in several equity markets in the world. 3 Virgin Island (VG), Bermuda (BM) and Cayman Islands (KY) are British colony.
The other data are collected in Thomson DataStream with ISIN number of target firms. The data contains stock price of each target firm around announcement date and daily stock return of target stock index from 2004 to 2012.
The following Table 2 presents the brief characteristics of these cross-border acquisitions. Panel A presents the annual distribution of the cross-border acquisitions. The years 2009, 2008, and 2005 had the top three largest numbers of announcements of cross-border acquisitions and they accounted 51.6% of my total dataset. Panel B reflects Chinese enterprises made most of announcements of cross-border acquisitions with 15.4% of total dataset. United States and Netherlands acquirers are the second with 12.1%. Companies from Canada and Australia are the third with 7.7% of total dataset. Panel C shows the most of cross-border acquisitions in my dataset were completed, which 34.1% were not completed. Panel D illustrates that 58.3% of cross-border acquisitions are not industry diversification takeover.
Table 2
Brief characteristics of the dataset.
Panel A:
Acquisition year 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total
Number 13 14 3 5 15 18 4 8 11 91
Percent % 14.3 15.4 3.3 5.5 16.5 19.7 4.4 8.8 12.1 100
Panel B: (Top3)a
Acquirer country China United States Netherlands Canada Australia Total
Number 14 11 11 7 7 50
Percent % 15.4 12.1 12.1 7.7 7.7 55
Panel C: Deal status
Completed Not completed Total
Number 60 31 91
Panel D: Industry
Same Industry Different Industry Total
Number 53 38 91
Percent % 58.3 41.7 100
a. The whole list of the acquirers and targets’ countries is presented in Appendix A.
3.2 Variables description
In this subsection I present my independent variables including dummy variable for cultural distance, dummy variable for investor protection, and control variables including target size, industry, targets’ score of revised anti-director index, acquirers’ law origin, deal method of payment, deal status. Table 3 is a summary of all variables.
3.2.1 Independent Variables (1) Cultural distance
Following the approach of Kogut and Singh (1988), Hofstede cultural distance theory will be used to test the cultural differences between acquirers and targets. Hofstede’s culture index provides data for calculating national cultural distance of the two acquisition parties.
CDij = !!!! !"#!!"#! !/!"} (1)
Where CDijis the cultural difference between the ith and jth country; Iin is the score of ith country for nth cultural dimension and Ijn is the score of jth country for nth cultural dimension. Vn is the variance of nth cultural dimension. Hofstede divides national culture into six dimensions, including power distance, uncertainty avoidance, individualism, masculinity, long-term orientation, indulgence versus restraint. This paper will use latest data from Hofestde’s official website to calculate cultural distance between acquiring and target firm according to the formula mentioned above.
(2) Investor protection
expropriation by corporate insiders (Djankov et al, 2008, henceforth DLLS). It not only captures the central problems of corporate governance for countries, law’s effectiveness, legal origin raised by LLSV (1998), but also provides some suggestions for future regulation strategies (DLLS, 2008). The scores of 72 countries have been included in this index. The components of the index are classified as ex ante private control of self-dealing and ex post private control of self-self-dealing. The score of each country is an average of these components, which ranges from 0.08 to 1.0 with a mean 0.44 for the 72 countries in DLLS (2008). The differences of the degree of investor protection for acquirers and targets’ countries will be calculated as Eq. (2).
IPij = ASDIi− ASDIj (2)
Where IPij means the difference of anti self-dealing score of country i and country j;
ADSIi means the anti self-dealing score of country i; ADSIj means the anti self-dealing
score of country j. 3.2.2 Control Variables (1) Same industry
Martynova and Renneboog (2006) found that the shareholders of target companies earn lower abnormal return in industry related merger than in conglomerate. Denis, Denis and Yost (2002), Dos Santos, Errunza, and Miller (2008) argue that companies are likely to face deeper value discount if they are on the way to international and industrial diversification. However, lots of authors start to provide explanations for positive effects of diversification. Stulz (1990) believes that industrial diversified companies may have greater conglomerate power, result in facilitating them to balance gains and loses. Corhay and Rad (2000) provides evidence on positive effects of diversification strategy by investigating Dutch firms involved in cross-border acquisitions in period 1990-1996. Their results show that synergetic gains generated by industrial diversification exceed synergetic gains generated by same industry.
(2) Deal status
variable. It will be reflected by a dummy variable. It equals 1 if the deal status denoted by Zephyr database is completed, otherwise equals 0. I incorporated this variable into my regression model for the reason that the sample will be very small if I excluded the deals that are completed.
(3) Target size
Following the study of Anderson et al. (2009), they deployed target size as control variable and got significant coefficient in their research of relationship between investor protection legislation and target takeover returns. In accordance with previous research, there could be more potential for conflicts if the size of the target firm is larger (Kusewitt, 1985; Haleblian and Finkelstein, 1999; Larsson and Finkelstein, 1999).
(4) Targets’ investor protection level
Refering to John et al. (2010), they divided the whole sample into two subsamples according to investor protection of target level when they studied the announcement return and investor protection. The variable will be added in my study as well, named targets’ investor protection level. The purpose is to facilitate further analysis in latter part. More specifically, this variable allows me to classify my sample into four subsamples and help me to analyze the characteristics of cumulative abnormal return in each subgroup. The score of targets’ countries in revised anti-director index will measure the targets’ investor protection level. The revised anti-director index is organized by DLLS (2008) and covers 72 countries. The index contains six components, which are vote by mail, shares not deposited, cumulative voting, oppressed minority, pre-emptive rights and capital to call a meeting6. The higher score means greater power of shareholders and higher level of investor protection.
(5) Year
Martynova and Renneboog (2008) draw a conclusion by researching one-century corporate takeovers, that the profitability of takeover happened at a later phase of the takeover wave is lower than it at the beginning of the wave. Therefore, year dummy
6
variables are added in my study in order to capture the characteristics of cumulative abnormal returns in each year.
Table 3
Variable description
Variable Description
Variables Description Source
CAR Cumulative abnormal return Datastream Cultural
Distance
Dummy: =1 if cultural distance between the merging companies is greater than the average cultural distance of this sample (1.064140302); =0
if it equals or is smaller than the average.
Hofstede official website Investor
Protection
Dummy: =1 if the difference of anti-self dealing score between the merging companies (the acquirer-the target company) is greater than the
average (-0.184945055); =0 if it equals or is smaller than the average
DLLS (2008)
Industry Dummy: =1 if the industry of the acquirer is the
same as the industry of the target firm; =0 if not Zephyr Deal Status Dummy: =1 if the deal status is completed; =0 if the other Zephyr Target Size Target size is measured by log of transaction cost Zephyr
TARad
Dummy: =1 if the target firm’s revised anti-director index score is greater than the average score of total target firms (3.912087912); =0 if it
equals or is smaller than the average.
DLLS (2008)
D5 Dummy: =1 if the announcement date of the deal is in 2005; =0 if it is in other time period Zephyr D6 Dummy: =1 if the announcement date of the deal
D9 Dummy: =1 if the announcement date of the deal
is in 2009; =0 if it is in other time period Zephyr D10 Dummy: =1 if the announcement date of the deal is in 2010; =0 if it is in other time period Zephyr D11 Dummy: =1 if the announcement date of the deal is in 2011; =0 if it is in other time period Zephyr D12 Dummy: =1 if the announcement date of the deal
is in 2012; =0 if it is in other time period Zephyr
Compiled by author
3.3 Event Study
To determine the success of an acquisition, financial theory suggests shareholder value yields is an efficient evaluation criterion and also the main objective of a company (Martynova and Renneboog, 2008). I use event study methodology, which is the dominant approach to analyze short-term shareholder wealth effects of targets, with the assumption that acquisition announcements provide new information to the market, and the share prices reflect and update investors’ expectations about companies’ prospects. Event study methodology applies the short-term cumulative abnormal return (CAR) of shareholders around announcement day as the measurement of wealth effect. The event day (day 0) is either the announcement day of the acquisition, or the next trading day if the announcement day of the acquisition is not a trading day. The event window is placed around the event day. In this study, traditional 3-day measure around the announcement day will be utilized. Following the previous studies, the abnormal return will be calculated by the difference between target firm’s stock return and its listed market index stock return based on the modified market-adjusted model (Conn et al, 2005; Doukas and Petmezas, 2007).
Therefore, the abnormal returns over the 3 days are summed up to calculate the cumulative abnormal returns.
𝐶𝐴𝑅𝑗 = !!! 𝐴𝑅𝑗𝑡
!!!! (3)
CAR of target companies. Therefore, simple hypothesis test is made to test the first hypothesis suggested in the part 2.1 by using t-test to see whether cumulative abnormal returns are significantly different than zero.
3.4 Cross-sectional analysis
The multiple regression analysis will be utilized to test my hypothesis. The estimation model is:
CARi= α +β1*CDi + β2*IPi + β3*Industryi + β4*Successi + β5*TarSizei + β6*ANTIDIREi + β7*Year05 + β8*Year06 + β9*Year07 + β10*Year08 + β11*Year09 + β12*Year10 + β13*Year11 + β14*Year12 + εi (4)
Where CARi is the cumulative abnormal return for the target firm in acquisition announcement t. CDi is the dummy variable that equals 1 if cultural distance between the merging companies in acquisition announcement i is greater than the average cultural distance of this sample, otherwise it equals 0 if the cultural distance equals or is smaller than the average. IPi is the dummy variable that equals 1 if the difference of anti self-dealing score between the merging companies in acquisition announcement i (the acquirer-the target company) is greater than the average, otherwise it equals o if the difference of anti self-dealing score equals or is smaller than the average. Industryi7 is the dummy variable for acquisition announcement i. It equals 1 if the industry of the acquirer is the same as the industry of the target firm; otherwise it equals 0 if the industry of the acquirer is not the same as the industry of the target firm. Successi is the dummy variable for acquisition announcement i. It equals 1 if the deal status is completed, otherwise equals 0 if the deal status is not completed. TarSizei is the size of target company, which will be calculated by log of transaction cost. ANTIDIREi is the dummy variable for acquisition announcement i. It equals 1 if the target firm’s revised anti-director index score is greater than the average score of total target firms, otherwise it equals 0 if the target firm’s revised anti-director index score equals or is smaller than the average. Starting from year 2005, the dummy variable YearY is set at one if the acquisition i is announced in year Y, and 0 if otherwise.
Eq. (4) provides a way to test Hypothesis 2 and Hypothesis 3 by including control variables. Hypothesis 2 can be supported if I find a significant and positive sign for the coefficient β1. Hypothesis 3 can be supported if I find a significant and negative sign for the coefficient β2. The results will be reported in next section. In addition, the equation will incorporate other control variables for later robustness tests.
4. Results
4.1 Target-firm cumulative abnormal returns
Table 4 presents the cumulative abnormal returns for target firms of 91 cross-border acquisitions around announcement date in the 3-day event window from 2004 to 2012. The table also presents the cumulative abnormal returns in different subsamples such as year allocation, acquirers’ country allocation and so on.
Moreover, Panel B presents the target firm will get significantly positive cumulative abnormal returns no matter whether its industry is the same as acquirer’s. The result (Panel C) shows that incomplete deal of cross-border acquisitions bring significantly positive and higher cumulative abnormal returns than complete deal of cross-border acquisitions. Table 4 (Panel D) also shows larger size of target firms bring higher significantly positive cumulative abnormal returns to target firms in cross-border acquisitions. More interestingly, Acquirers from the Netherlands (account 12.1% of total sample) brought 12% cumulative abnormal returns to target firms in their global expansion.
Table 4
Tests on cumulative abnormal returns for targets of cross-border acquisitions
N Mean Std.Dev. t-value p-valuea
Total sample 91 0.044 0.121 3.446 0.001 Panel A: Year 2004 13 -0.013 0.034 -1.358 0.200 2005 14 0.055 0.094 2.194 0.047 2006 3 -0.005 0.093 -0.086 0.939 2007 5 0.035 0.130 0.609 0.575 2008 15 0.058 0.097 2.298 0.038 2009 18 0.010 0.069 0.618 0.545 2010 4 0.034 0.050 1.361 0.267 2011 8 0.069 0.227 0.865 0.416 2012 11 0.134 0.189 2.349 0.041
Panel B: Same or different industry
Same industry 53 0.044 0.113 2.850 0.006
Different industry 38 0.043 0.133 1.993 0.054
Panel C: Deal status
Success 60 0.037 0.112 2.548 0.014
Other 31 0.057 0.139 2.306 0.028
Small 50 0.033 0.120 1.920 0.061
Large 41 0.057 0.122 3.006 0.005
Panel E: Acquirers’ country
China 14 -0.014 0.044 -1.175 0.261
United States 11 -0.025 0.083 -0.976 0.352
Netherlands 11 0.120 0.151 2.638 0.025
Canada 7 -0.006 0.077 -0.219 0.834
Australia 7 0.006 0.054 0.313 0.765
The tables CARs are for an event window of 3 days
a. p-values based on a t-test of the alternative hypothesis of inequality to zero.
I further divided the whole sample into several subsamples according to the level of cultural distance and investor protection differences between acquiring and target firms in order to preliminary observe characteristics of cumulative abnormal returns in these different sub-groups. Table 5 shows all the cumulative abnormal returns for all subsamples of announcements of cross-border acquisitions are positive, and quite often significant. The results (Panel A) reflects that when cultural distance between the acquiring and target firm is lower than average, the target firm will obtain positive cumulative abnormal return. But the result of difference with zero does not prove a statistical significance. However, when cultural distance between the acquiring and target firm is greater than average, the target firm will also earn positive cumulative abnormal return and significant. If I look at the numerical results, target firms having greater cultural distance with acquiring firms will get higher cumulative abnormal returns than those having smaller cultural distance with acquiring firms. And the difference between these two groups is significant in the level of 10%.
more cumulative abnormal returns if the acquiring firm comes from country with stronger investor protection environment compared with target country. But the difference between these two groups is not significant.
In order to grasp more information about characteristics of cumulative abnormal returns in different sub-groups and the effect of investor protection, I divided the whole sample into four groups according to acquirers and target firms’ investor protection level. More specifically, investor protection difference between acquiring and target firms does not demonstrate the condition of target country’s investor protection level. The difference that is greater than the average only proves acquiring firm with stronger investor protection than target firm, but fail to identify whether the target firm comes from country with higher or lower investor protection level. It could be a situation that the acquiring and target firms both come from the countries with high protection level, but the investor protection level of acquirer’s country is little higher than of target country. Panel C shows positive cumulative abnormal returns to target firms in these four groups. But cross-border acquisition bring significantly positive cumulative abnormal returns to target firms only when acquirers come from higher-protection country and targets come from low-protection country. The difference among four groups is significant.
Table 5
Tests on cumulative abnormal returns for targets of cross-border acquisitions by subgroups
N Mean SD t-value p-valuea
Panel A: Cultural distance between acquiring and target firms
CD<average 54 0.026 0.116 1.665 0.102
CD>average 37 0.069 0.126 3.354 0.002
p-valueb -1.685 0.096
Panel B: Investor protection difference between acquiring and target firms
Difference<average 54 0.033 0.112 2.161 0.035
Difference>average 37 0.060 0.134 2.716 0.010
p-value -1.038 0.302
Higher-protection acquirer countryc; High-protection target countryd
5 0.181 0.268 1.506 0.207
Higher-protection acquirer country; Low-protection target country
32 0.041 0.094 2.466 0.019
Lower-protection acquirer country; High-protection target country
45 0.022 0.101 1.455 0.153
Lower-protection acquirer country; Low-protection target country
9 0.088 0.151 1.748 0.119
p-value 3.238 0.026
This table presents summary statistics of selected variables for 91 cross-border acquisitions during the period 2004-2012.
a p-Values based on a t-test of the alternative hypothesis of inequality to zero. b p-Values of differences between sub-groups.
c classification of higher and lower protection acquirer country based on investor protection variable, higher-protection acquirer country if the difference of anti-self dealing score between the merging companies (the acquirer-the target company) is greater than the average (-0.185); lower-protection acquirer country if it equals or is smaller than the average.
d classification of high and low protection target country based on targets’ score of revised anti-director index, high-protection target country if the target firm’s revised anti-director index score is greater than the average score of total target firms (3.912); low-protection target country if it equals or is smaller than the average.
4.2 Results of the cross-section analysis
Table 6 presents the results of my cross-sectional regression analysis of the cumulative abnormal returns based on event windows of 3 days and 5 days. Column 1 and Column 2 are results that I incorporate cultural distance variable and investor protection variable into regression model respectively based on event window of 3 days. In Column 3, I show the result for the regression model incorporating cultural distance variable and investor protection variable simultaneously based on event window of 3 days. In Column 4, the results are presented based on event window of 5 days.
variable and investor protection variable simultaneously provides a statistically significant F-test at 10% and 1% level respectively. The results of Model 1 show that the variable that represents the cultural distance between the acquiring and target firm has a significant coefficient. This implies that the target firms having larger cultural distance with the acquirers may obtain higher cumulative abnormal returns than those having smaller cultural distance with the acquirers. In Model 2, investor protection variable replacing cultural distance has been incorporated into the cross-sectional regression analysis of the cumulative abnormal returns. But I do not find significant coefficient of investor protection variable.
However, I find both significant effects of cultural distance variable and investor protection variable when I incorporate cultural distance variable and investor protection variable simultaneously into the regression model for event windows of 3 days and 5 days. The effects of cultural distance variable and investor protection variable are significantly positive, and the significance level increases to 1% from 5% when I used 5-day event window instead of 3-5-day. More specifically, plus sign of the coefficient of cultural distance variable indicates high cultural differences are associated with an increase in cumulative abnormal returns to targets’ shareholders. So, my second hypothesis is supported.
And, plus sign of the coefficient of investor protection variable implies that target firms will obtain higher cumulative abnormal return around announcements of cross-border acquisitions if acquiring firms come from countries with stronger investor protection than target firms. This result is contradictory with my third hypothesis. Therefore, the third hypothesis is rejected.
shareholders of target firms might expect the firms they invested would accept more stringent standards of investor protection and get increasing concern for shareholders’ value. So they made positive reactions to the acquisitions based on potential benefits brought by acquiring firms’ stronger investor protection level.
The second explanation could be that target firms with more concentrated ownership structure in weaker legal environment tend to request higher prices for their shares. In other words, the bidders tend to pay more money than the real value of target firms even though the target firms seems like being at disadvantages due to the lower investor protection environment.
The third explanation could be wealth is more likely to be appropriated by management in weak investor protection countries. The situation leads to lower demand for shares and this in turn result in lower valuations of targets’ shares. Acquiring firms might make higher offers to compensate shareholders due to lower valuations of targets’ shares and still extract adequate synergistic gains from the acquisitions.
Moreover, I also find significantly positive effects of target size on cumulative abnormal returns to targets’ shareholders. And the significance level increases to 5% from 10% if I used 5-day event window instead of 3-day. It indicates that bigger size the target firms have, the higher cumulative abnormal returns the target firms will get in cross-border acquisitions. This result is consistent with Anderson et al. (2009).
with weak investor protection environment. This is consistent with Anderson et al. (2009)’s finding that target firms in countries with strong investor protection achieve higher announcement return because their greater bargaining power forced bidders to offer larger premiums.
Table 6
Results of cross-section analysis for the whole sample
Model 1 Model 2 CAR (-1, +1) a CAR (-2, +2) b
p- value of
F-test 0.200 0.302 0.100 0.000
This table presents estimates of cross-sectional regressions relating the cumulative abnormal returns and firm variables for cr0ss-border acquisitions during the period of 2004-2012. The dependent variable is the cumulative abnormal returns from day-1 to day+1, and from day-2 to day+2 respectively, where day 0 is the announcement of the cross-border acquisition. The independent variables are: CD has a value of 1 if cultural distance between the acquirer and target is greater than the average cultural distance of this sample, otherwise 0; IPhas a value of 1 if the difference of anti self-dealing score between the acquirer and target (the acquirer-the target company) is greater than the average, otherwise 0; Industry has a value of 1 if the industry of the acquirer is the same as the industry of the target firm; otherwise 0; Successhas a value of 1 if the deal status is completed, otherwise 0; TarSize is the size of Target Company, which will be calculated by log of transaction cost; ANTIDIREi has a value of 1 if the target firm’s revised anti-director index score is greater than the average score of total target firms, otherwise 0; Year05 is set at 1 if the acquisition announced in 2005, otherwise 0; other year dummies are set as the same logic as Year05.
* Statistically significant at 0.1 level
** Statistically significant at 0.05 level *** Statistically significant at 0.01 level
a.Correlation coefficients for all variables for event window of 3 days are presented in Appendix C.
b. Correlation coefficients for all variables for event window of 5 days are presented in Appendix D.
4.2.1 Robustness tests
In my robustness test, two additional variables are added to the regression equation. The first additional variable is law origin of acquiring firms. It is the dummy variable that equals 1 if the law origin of the acquirer is English law, otherwise it equals 0 if the law origin of the acquirer is not English law. The second additional variable is the dummy variable for method of payment8. It equals 1 if the deal method of payment is cash, otherwise it equals 0 if the deal payment is in other method. I did the cross-sectional regressions twice by deploying the event window of 3 days and 5 days respectively. The
8Schwert (1996) found that shareholders of target firms benefit more from all-cash bids than all-equity
bids. Consistent with this finding, Andrade et al (2001), Goergen and Renneboog (2004) proved that all-cash bids trigger higher target returns than all-equity bids. Moreover, Heron and Lie (2002) found that cash
payment is relatively preferred in cross-border acquisitions. They argue that direct cash payment is more effective than complex equity payment because cash payment could reduce the negative feelings of targets’ shareholders caused by acquisitions.
results are reported in Column 1 and Column 2 of table 7.
A comparison of the regression with (Column 1 of table 7) and without these variables (Column 3 of table 6) for 3-day event window shows that both of the two additional variables (Law, Payment) have insignificant results, more importantly, the coefficients of cultural distance variable and investor protection variable remain significant.
Furthermore, a comparison of the regression with (Column 2 of table 7) and without these variables (Column 4 of table 6) for event window of 5 days shows that the coefficients of four variables (CD, IP, Target size, ANTIDIRE) remain significant positive. But the coefficient of the Success variable represents the deal status of the acquisition become insignificant. And the Payment variable represents method of payment has a significant positive coefficient at the level of 10%, which indicates that shareholders of target firms benefit more from cash bids than other-payment bids. This result is consistent with the findings of Schwert (1996), Andrade et al (2001), Goergen and Renneboog (2004).
Table 7
Robustness test on the cross-section analysis for CAR (-1, +1) and CAR (-2, +2)
Year05 0.047 (0.970) 0.004 (0.060) Year06 -0.002 (-0.030) -0.078 (-0.860) Year07 0.088 (1.380) 0.076 (1.010) Year08 0.119 (2.510)** 0.120 (2.130)** Year09 0.079 (1.730)* 0.088 (1.640) Year10 0.063 (0.950) 0.094 (1.190) Year11 0.133 (2.300)** -0.809 (-11.860)*** Year12 0.164 (3.030)*** 0.140 (2.190)** Constant -0.284 (-2.610)** -0.423 (-3.280)*** Observations 91 91 R-square 0.260 0.810 F-test 1.60 19.49 p- value of F-test 0.091 0.000
The dependent variable is the cumulative abnormal return for event windows of 3 days and 5 days. The independent variables CD, IP, Industry, Success, TarSize, ANTIDIRE, Year05, Year06, Year07, Year08, Year09, Year10, Year11, Year12 are defined in the same manner as in table 6. Law is the dummy variable that equals 1 if the law origin of the acquirer is English law, otherwise 0; Payment is the dummy variable for method of payment that equals 1 if the deal method of payment is cash, otherwise 0.
* Statistically significant at 0.1 level
** Statistically significant at 0.05 level *** Statistically significant at 0.01 level
4.2.2 Further analysis
protection than the target firm when the cultural distance between these two companies is small. In other words, the variable of cultural distance between acquiring and target firms makes the positive relationship between investor protection difference and targets’ abnormal return less significant.
I also find that the variables of Success and ANTIDIRE have significant effects on targets’ abnormal return in the regressions for both event window of 3 days and 5 days. It implies the target firm will earn much higher cumulative abnormal returns if the deal is completed in cross-border acquisition than if the deal is not completed when the cultural distance between the acquirer and target is small. And, the ANTIDIRE variable represents the target investor protection level has a significant positive coefficient at the level of 1%. It indicates that target firms with strong investor protection environment will get much higher cumulative abnormal returns than target firms with weak investor protection environment when the cultural distance between the acquirer and target is small.
Table 8
Results of cross-section analysis for the sub-samples
CD<Average CD>Average
CAR (-1, +1) CAR (-2, +2) CAR (-1, +1) CAR (-2, +2)
Year08 0.117 (2.070)** 0.150 (2.310)** 0.155 (2.450)** 0.139 (1.970)* Year09 0.110 (2.040)** 0.140 (2.270)** 0.050 (0.770) 0.049 (0.680) Year10 0.077 (0.830) 0.006 (0.060) -0.005 (-0.707) 0.054 (0.580) Year11 0.216 (2.840)*** -0.643 (-7.420)*** 0.003 (0.050) -1.009 (-12.980)*** Year12 0.120 (1.580) 0.135 (1.560) 0.283 (4.370)*** 0.231 (3.180)*** Law -0.042 (-1.110) -0.046 (-1.060) 0.095 (1.850)* 0.070 (1.200) Payment 0.047 (1.380) 0.047 (1.230) 0.067 (1.180) 0.112 (1.770)* Constant -0.494 (-3.670)*** -0.707 (-4.600)*** -0.110 (-0.650) -0.279 (-1.490) Observations 54 54 37 37 R-squared 0.4643 0.8511 0.6769 0.9402 F-test 2.14 14.10 2.93 22.01 p-value of F-test 0.0303 0.0000 0.0119 0.0000
The dependent variable is the cumulative abnormal return for an event window of 3 days and 5 days respectively. The independent variables IP, Industry, Success, TarSize, ANTIDIRE, Year05, Year06, Year07, Year08, Year09, Year10, Year11, Year12, Law, Payment are defined in the same manner as in table 7.
* Statistically significant at 0.1 level
** Statistically significant at 0.05 level *** Statistically significant at 0.01 level
The results (Table 9 Column 1and 2) show that the variable of Industry has significant effect on targets’ cumulative abnormal return in the regressions for both event windows of 3 days and 5 days. It implies target firms come from countries with stronger investor protection environment will earn much higher cumulative abnormal return if the acquirers is the same industry as the target firms.
Table 9
Results of cross-section analysis for the sub-samples
IP<Average IP>Average
CAR (-1, +1) CAR (-2, +2) CAR (-1, +1) CAR (-2, +2)
The dependent variable is the cumulative abnormal return for an event window of 3 days and 5 days respectively. The independent variables CD, Industry, Success, TarSize, ANTIDIRE, Year05, Year06, Year07, Year08, Year09, Year10, Year11, Year12, Law, Payment are defined in the same manner as in table 7.
* Statistically significant at 0.1 level
** Statistically significant at 0.05 level *** Statistically significant at 0.01 level
5. Conclusion
This paper studies the short-term cumulative abnormal returns of target shareholders in cross-border acquisitions and also the effects of cultural differences and investor protection differences between acquiring and target firms on short-term reactions of target shareholders respectively. Previous researches show that targets’ shareholders profit from cross-border acquisitions. For my sample of cross-border acquisitions, I find that shareholders of target firms do get significantly positive cumulative abnormal returns. This is consistent with existing literatures.
Though existing studies present different arguments of the effects of cultural distance in cross-border acquisitions. I find that target firms having larger cultural distance with the acquirers may obtain higher cumulative abnormal returns than those having smaller cultural distance with the acquirers.
In contrast with arguments suggested by most of previous studies regard to the effects of investor protection (Anderson et al, 2009; Starks and Wei, 2004; Bris and Cabolis, 2008), I find that target firms will obtain higher cumulative abnormal return around announcements of cross-border acquisitions if acquiring firms come from countries with stronger investor protection than target firms. This result is consistent with the finding of
Kuipers et al (2009). But they focus law enforcement and creditor protection of acquirers’ countries, while I focus on differences of shareholder protection between acquiring and target firms. The first explanation for this result could be that shareholders of target firms might expect the firms they invested would accept more stringent standards of investor protection and get increasing concern for shareholders’ value. The second explanation could be that target firms with more concentrated ownership structure in weaker legal environment tend to request higher prices for their shares. The third explanation could be wealth is more likely to be appropriated by management in weak investor protection countries. The situation leads to lower demand for shares and this in turn result in lower valuations of targets’ shares. Acquiring firms might make higher offers to compensate shareholders due to lower valuations of targets’ shares and still extract adequate synergistic gains from the acquisitions.
Furthermore, results generated by cross-sectional regressions of subsamples showed that, for small cultural distance between the acquiring and target firm, the target firm will obtain even much higher cumulative abnormal return around announcements if the acquiring firm comes from countries with stronger investor protection. For the target firm comes from country with stronger investor protection than the acquirer, greater national cultural distance between the acquirer and target firm will bring much higher cumulative abnormal return to target shareholder around announcements.
acquisitions, but also capture the effects of cultural distance and investor protection in integration process of acquisitions. Secondly, I only studied the announcement effect on target shareholders. Empirical literatures also showed contradictory results of announcement effect of cross-border acquisitions on acquirers’ shareholders. It is interesting to investigate whether the variables of cultural distance and investor protection are significant factors in explaining positive or negative announcement returns of acquirers. Thirdly, I investigate the effects of cultural differences only on national level. Other researches could focus on impacts of key dimensions of national cultural differences or organizational cultural differences on cross-border acquisitions in order to have more detailed and in-depth understanding of culture factor.
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