University of Groningen Faculty of Economics and Business The effect of cultural, institutional, and economic distance on Chinese acquirer performance conducting outward M&A

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(1)University of Groningen Faculty of Economics and Business. The effect of cultural, institutional, and economic distance on Chinese acquirer performance conducting outward M&A. Master Thesis. Groningen 2011. Wietze Feddema (1531905). Supervisor:. feddema@gmail.com. Killian McCarthy. 1.

(2) Abstract The last two decades are characterized by rapid international expansion of Chinese enterprises. M&A is often used by Chinese companies to enter foreign markets. An interesting question of investors is whether investments made by Chinese firms outside the Chinese Mainland create value for shareholders. Through the use of an event study, 212 M&A deals of 150 different companies during the period 1992 till March 2011 are analysed. The results show that Chinese outward M&A activities enhances the performance of the acquirer. Moreover, the effects of cultural, institutional and economic distance on the performance of the M&A activities are examined.. Key words: Chinese outward M&A, cultural distance, institutional distance, economic distance. 2.

(3) Table of contents. I. Introduction ............................................................................................................................. 4 II. Literature Review ................................................................................................................... 6 III. Research Method ................................................................................................................ 13 IV. Results ................................................................................................................................ 20 V. Discussion ............................................................................................................................ 27 VI. Conclusion .......................................................................................................................... 28. 3.

(4) I. Introduction Since 2003 Chinese Outward Foreign Direct Investment (henceforth Chinese OFDI) increased dramatically. Figure one shows a Chinese ODFI in the period 1990 till 2010, the increasing trend starting in 2003 is undeniable. After a small dip in 2009 non-financial OFDI increases again in 2010 up to a total amount of $59billion US dollar, including investments in 129 countries and regions affecting 3,125 foreign companies.1 In 2010 China became the fifth largest investor in the rest of the world, after the US, Germany, France and Hong Kong SAR (UNCTAD World Investment Report 2011). The UNCTAD stated that a significant share of the OFDI consist of cross-border M&A. An interesting question in both the field of international business and international economics is whether Chinese overseas investment will add to the value creation by Chinese companies. Chinese outward M&A is defined as a Mainland Chinese acquirer buying a target company outside the Chinese mainland. Will Chinese companies be able to gain from advantages in synergies, scale and scope from OFDI activities? Or to be more specific, will Chinese companies gain from conducting cross-border M&A activities? The existing literature does not provide thorough answers to these questions and research on whether outward investments made by Chinese firms contribute to their performance is rather limited. Recent literature emphasises drivers between the recent boom in OFDI and appearance of Chinese multinational enterprises (MNEs). At macro level factors like the high foreign currency reserves (gathered from the trade surpluses and high savings rates) are important, as are ‘Go Global’ policies initiated by the Chinese government in 1999 (Morck et al., 2008; Cheung and Qian, 2009; Gu and Reed, 2010). At micro level, among other motives Chinese multinational enterprises (MNEs) conduct OFDI in order to acquire brands, knowhow, technology, resources, and excess to large markets (Lunding, 2006; Mathews, 2006; Kolstad and Wiig, 2010). However, studies focussed at Chinese outward M&A activity remains quite incomplete. For example, Luedi (2008) provides an analysis of 214 Chinese outward M&As in the period 1995 – 2007. Chinese outward M&As tends to underperform compared to Western outward M&As. A second paper which measures Chinese outward M&A performance is written by Gu and Reed (2010). Chinese outward M&A deals were examined in the time period starting in 1994 until 2008. Their conclusion entails that Chinese overseas M&A activities lead to positive firm performance, before and after the introduction of the “Go Global” policies. 1. Data from MOFCOM: http://english.mofcom.gov.cn/aarticle/statistic/foreigninvestment/201101/20110107386833.html. 4.

(5) These two studies are part of the limited quantity of literature researching the performance of Chinese outward M&A activities.. Chinese Outward FDI 70000 60000 50000 40000 30000. Chinese Outward FDI. 20000 10000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010. 0. Figure one: Chinese ODI measured in US Dollars at current prices and current exchange rates in millions (source: UNCTAD and MOFCOM). This paper investigates the firm performance of Chinese firms participating in the international business world through mergers and acquisitions. In order to test the performance of Chinese outward M&A, a sample will be drawn consisting out of 212 M&A deals of 150 different Chinese companies, over the period 1992 till March 2011. Among other, the data includes for example the acquisition of the Hungarian BorsodChem by Wanhua Polyrethanes for an amount equivalent to 1.7 billion US dollar. The performance of the firm conducting the M&A activity is measured using event study methodology. Special attention is devoted to cultural, institutional, and economical differences between China and other countries. Differences in these macro economical factors might insert significant influence on M&A performance. It turns out that Chinese outward M&A investments produce significant positive abnormal firm performance, as is measured by the stock return of the firm in question. Which macro economic factors insert a influence on the performance of Chinese outbound M&A activities remains unclear. This paper found a marginal negative effect of cultural distance, and a somewhat larger positive effect of institutional quality. It turns out that the relationship between M&A performance and economic distance is insignificant. The rest of this paper is organised as follows; section two will provide a literature review, special attention in the literature review is put on performance measures of M&As, research done on Chinese outward M&As, and hypothesis are developed. Section three elaborates the research methodology used in order to test the hypothesis developed in section two. Section four. 5.

(6) presents the outcome of the quantitative research. Section five provides a comprehensive discussion of the results. Conclusions are drawn in the final section.. II. Literature Review Special attention is devoted to three different literature streams. First, empirical research on the current boom and the characteristics of Chinese Outward Foreign Direct Investment (henceforth: Chinese OFDI) will be explored. Next, we will zoom in on a specific and growing section of the Chinese OFDI, namely Chinese cross-border M&A, or outward M&A. Third, the impact of cultural, institutional, and economic factors on M&A are examined, and the hypotheses about the impact of those factors on Chinese outward M&A are constructed.. 2.1 An overview of Chinese Outward Foreign Direct Investment Chinese outward foreign direct investment is a relatively new phenomenon. Literature about the recent booming outward investments from BRIC countries (and in particular) China is still rather limited. In 1979 the Chinese economy opened up. The head of the government, Deng Xiaoping, recognized the need for a more open and less regulated economy. The subsequent period 1979 – 1985 is characterised by cautious internationalisation. Outward Direct Investment was limited to only state-owned enterprises who where under direct control of China’s ministry of foreign economy relations and trade (which later became the Ministry of Commerce) and the State Economic and Trade Commission. The period 1986 – 1991 can be characterised by gradual liberalisation of the restrictive policies. Companies with a suitable joint venture partner and sufficient know-how and capital were allowed to open up foreign affiliates. However, total OFDI remained small. In the year 1992 Deng Xiaoping conducted his famous South China Tour, which was associated with significant domestic market liberalisation. Buckley et al. (2007) find that Chinese ODI changed after 1992, both in term of magnitude and the spread of different targets. The “going-global” strategy, which was launched in 1999 by the Chinese Government, is basically the birthday of Chinese Multinational Enterprises (henceforth: MNE). In 1999, the Chinese Government identified a need for “global champions” and began to support certain companies with particular financial and legal advantages. Motives behind the introduction of the “Go Global” policies are: 1. In order to reduce appreciation pressures on the Chinese currency, the Renminbi, Chinese enterprises were allowed and encouraged to invest abroad.. 6.

(7) 2. Questions were raised as to whether there would be sufficient (natural) resources to sustain the economic growth over the middle- and long-term. 3. Foreign technology and modern business practises are acquired to modernize the Chinese economy at a fast speed. A more open economy represents an opportunity to the bridge the gap between developed and developing economy, to catch up. In 2001 China became member of the WTO. Before 2003 private Chinese firms were legally prohibited from participating in international investments. However, in 2003 the Chinese Government opened up the international investment opportunities for the private sector. The effect was tremendous and OFDI skyrocketed. Models explaining international activity mainly focus on firms from developed countries. Dunning and Ludan (2008) provide a comprehensive overview of the leading theories behind foreign direct investment in the book Multinational Enterprises and the Global Economy. Among other theories the internationalisation theory, the resource based view, and the eclectic (OLI) paradigm of Dunning are leading theories explaining FDI. In short, the internationalization theory states that the combined net benefit of ownership of both the domestic and the foreign activities exceed the benefits offered by external trading relationships (like export or licensing). The internationalisation theory predicts that firms entering foreign markets in a gradual manner, first with relatively low resource commitments (like minority stake joint ventures, alliances etc.) and devote more resource commitment over time. The eclectic (OLI) paradigm of Dunning provides rationalization of FDI on the bases of three distinct competitive advantages. The first advantage is related to ownership specific advantages, a firm may have ownership over certain physical or intangible assets unavailable to its competitors. Second, location specific advantages like certain productions factors, cost and resources tight to a particular location may put one firm in an advantageous situation relative to its competitors. Last but not least, a firm may desire to internalize certain business processes in order to avoid negative effects of licensing, such as the hold-up problem, agency problems, and dissipation of firm-specific assets. Another leading theory explaining FDI is the resource based view, which considers a MNE as a bundle of resources or relevant information (Peng, 2001). However, these theories for international activity fail to explain why companies in emerging markets are eager to participate in the international economy. Companies from emerging markets often lack specific ownership or internalisation advantages. In the conventional theories about internationalisation MNEs own certain competitive advantages and these companies are going abroad to exploit those advantages. However, in last two decades, numerous “new” multinational enterprises emerged from. 7.

(8) developing countries. These “new” MNEs managed to build up large business empires in markets characterised by severe competition. A couple of examples of these “new” MNEs are Haier, Lenovo, Acer, and many more. Somehow, these new companies were able to become global player without clear and distinctive ownership or internalisation advantages. Limits of the conventional theory are recognized by several scholars in the last decade (Mathews 2006, Buckley et al. 2007, Gubbi et al. 2009). Research in the last couple of years puts large emphasises to come up with alternative explanations of emerging markets MNE behaviour. There are already several plausible explanations why firms with no clear outstanding ownership or internationalisation advantages conduct business abroad. An alternative framework for internationalisation of emerging market MNEs is offered by Mathews (2006). Instead of the OLI framework, a LLL framework is proposed. This new framework consist of resource linkage, leverage and learning. Emerging economy MNEs make use of the global business environment by acquiring, imitating or transferring certain competitive advantages. Companies from emerging countries operate internationally in order to gain access to or internalise certain strategic assets. In short, these companies use M&A activities to overcome the OLI framework disadvantages they face compared to Western country MNEs. Emerging market MNEs conduct M&A to gain quick access to critical resources, knowledge, and technology. However, a recent trend is that Chinese MNEs are more and more engaged in horizontal FDI, which is mainly driven by the need to efficiently supply large overseas markets (Buckley et al, 2007). What motivates Chinese companies to conduct investments overseas? Kolstad and Wiig (2010) find that Chinese outward FDI mainly flows to countries with a combination of large natural resources and poor institutions or to countries that have relatively large and rich markets. Outward FDI is measured using UNCTAD data in the period of 2003 - 2006. Quality of institutions is measured using the Rule of Law indicators of the World Bank Institute. Natural resource abundant countries are calculated by the percentage of fuels, ores, and metal exports of GDP (source: the World Bank Institute). FDI flows to large markets are mainly related to OECD countries, non-OECD countries attract more resource seeking FDI.. 2.2 Performance of Chinese outward M&A Up to now, evidence that Chinese outward M&A activities create value for the shareholders remain limited and mixed. Luedi (2008) finds out that Chinese outward M&A inserts a negative influence on firm performance. In an event study he examines a sample of 214. 8.

(9) Chinese outward M&As in the period 1995 – 2007. Chinese outward M&A tend to underperform compared to Western outward M&A. In more than half of the deals Chinese acquirers tend to overpay. Moreover, the cumulative abnormal return measured by the market capitalization from two days prior to two days after the announcement (as percentage of the transaction value), adjusted for market movements, tend to be negative. In contrast to negative returns of outward M&A activities, there are multiple cases of cross-border M&A creating value for shareholders (Harris et al., 1991 for Swiss cross-border M&A; Lowinski et al., 2004 for US cross-border M&A; Gubbi et al., 2009 for Indian cross-border M&A). Gu and Reed (2010) use cumulative abnormal stock returns in order to measure Chinese outward M&A performance. 145 M&A activities were examined in the time period starting in 1994 until 2008, using the Thomson database. The paper tested whether Chinese outward M&A after the introduction of the “Go Global” policy in 1999 performed less well, and if Chinese investment in the post-Go-Global era is redirected towards industries having national strategic value (at the expense profit value). The conclusion exhibits that Chinese overseas M&A adds shareholder value, even after the introduction of the “Go Global” policies. Our expectation is that the benefits from the acquisition of targets abroad outweigh the increased integration difficulties and costs.. The resource linkage, leverage and learning model proposed by. Mathews (2006) to explain why emerging market companies with no clear competitive advantage go abroad, it can be derived that emerging market MNEs tend to acquire companies that can provide them those advantages. According to Gubbi: “International acquisitions give emerging economy firms access to key strategic resources that may not be available in their domestic market, and thereby enhance their capabilities to be competitive”.2 Next to the strategic asset seeking motives to go abroad, Gubbi (2009) recognized a market-seeking motive for emerging market MNEs to participate in foreign acquisitions. Firms may acquire a target in order to get easy access to a large customer market. Moreover, acquisitions abroad may be motivated by the need to gain advanced managerial knowledge and business practises (Morosini et al., 1998). Chinese companies that go abroad are likely to be the better performing companies in the Chinese home market. Moreover, the Chinese government has the desire to create global companies and supports companies that conduct business abroad. Chinese companies often face a favourable treatment of Chinese state owned enterprises (favourable finance conditions and other government support). The international environment may open the door for Chinese firms to acquire certain technologies, valuable knowledge, and. 2. Gubbi et al., 2009, page 8. 9.

(10) access to rich markets. Acquisition may provide easy and quick access to those assets and rich markets. Hence, it is likely that Chinese companies that participate in the international business environment are able to earn a better result than companies that stay domestic in scope. This leads to the first hypothesis, namely:. Hypothesis one: Chinese outward M&A will generate positive value for the owners of the firm in question.. 2.3 Cultural, Institutional, and Economic distance and M&A performance Empirical research has show that cultural, institutional (or political) and economic factors are important in explaining FDI flows in general, and the value creation of cross-border M&A in specific (Morosini et al. 1998; Ghemawat, 2001; Chakrabarti et al., 2009; Gubbi et al., 2009; Rues et al., 2009; Kolstad and Wiig, 2010). To our knowledge, this will be the first time such a comprehensive analysis of macro environmental factors related to Chinese outbound M&A is conducted.. Cultural distance Based on a summary of several consultancy studies investigating up to 700 unique transnational M&A events, Pautier (2003) concluded that managing cultural differences between different organizations is crucial for M&A deal to achieve success. However, whether cultural distance exhibit a positive or a negative effect on firm performance remains unclear. Stahl and Voigt (2008) conducted a meta-analysis of 46 empirical studies, including a sample of 10,710 M&A events. They concluded that there is no clear answer whether cultural distance has a diminishing or enlarging effect on firm performance. Clearly, large cultural distance represents a trade-off between, one the one hand, increased integration difficulties, costs and risk associated with the distance and, one the other hand, the enhanced learning experience and value creation due to the large distance (Reus et al., 2009). Globalising Chinese MNEs face the challenge of incorporating different cultures backgrounds into one organization, for instance combining Western and Chinese types of cultural norms and values (Jane et al., 2008). Mary Ma, CFO of Lenovo, addressed challenges related to cultural differences very clear in an interview about the acquisition of the personal PC division of IBM: “cultural integration is still one of the biggest challenges ... we face the combined effect of different corporate cultures and the difference between the cultures of the. 10.

(11) East and the West”3. China has a particular culture which is quite different from Western country cultures. By acquiring companies in different cultural environment a company can incorporate superior business practices from several different cultures. Rues et al (2009) find evidence of both a negative and positive relationship of cultural distance. Based on a sample of 118 US acquisition, Reus concluded that cultural distance may cause restraints in the ability to understand the target, transfer of key capabilities, and communication between the acquirer and the target. On the other hand, when an organisation fosters communication between a culturally distant target and understands the cultural differences, there is large potential for the transfer of new resources to the acquiring firm and hence an increase in performance. Transferable resources may include, for instance, the gathering of knowledge about superior management structures, knowledge about new markets, and knowledge about advanced technologies and other related assets. In case of large cultural differences companies may devote significant resources and attention to deal with those differences. Morosini et al. (1998) finds evidence that M&A activities in culturally distinct countries enhance firm performance. His sample contains 52 cross-border acquisitions, made by Italian companies, over the time period 1987 till 1992. The rationale behind the idea that cultural distance has a positive relationship with firm performance comes from the idea that a firm enlarges the possession of various routines and repertoires for various different cultures. Different cultures incorporate different routines and repertoires related to the degree of entrepreneurship, decision-making practises, innovation effectiveness and more business- related areas (Morosini et al., 1998). Morosini puts forward two different ways in which cross-border M&A deal enhance firm performance. First, the learning experience, a firm gains knowledge from the newly acquired firm. In a certain national culture firms are unwilling or unable to perform business processes differently, or to change certain business processes (due to routine, tradition, and related). Combining organisations from culturally distant environments may enhance a learning curve towards better-organized business processes. Second, a firm acquiring a target in a culturally distinct country may specialize routines to the specific cultural context. Hence, trough this specialization a MNE is better able to tailor its routines to the culturally different country-specific environment. Moreover, Chakrabarti et al. (2009) finds that culturally distant acquisitions creates more shareholder value than culturally close ones, by analysing over 800 M&As using buy-and-hold abnormal returns. Emerging economy MNEs make use of the global business environment by acquiring, imitating or transferring. 3. Jane et al., 2007, Interview with McKinsey, page 19. 11.

(12) certain competitive advantages. Companies from emerging countries operate internationally in order to gain access to or internalise certain strategic assets (Mathews, 2006). Value creating of Chinese companies often occurs in the combination of the Chinese low cost production facilities with Western brands, knowledge/technology and other assets (Hirt et al., 2006). In other words, Chinese companies that lack certain developed technological and managerial knowledge look across the border to acquire a target that provide them quick access to that knowledge. The Chinese government also recognized this effect, one of the motivations behind the ‘go global’ policy is the need for acquisition of foreign advanced technologies and business practises to modernize the Chinese economy (Gu et al., 2010). As we saw from the discussion above cultural distance leads to higher integration costs, but also opens the way to key technologies and other valuable resources. The expectation will be that the gains will outweigh the cost for Chinese companies and, hence, the second hypothesis will be as follows:. Hypothesis 2: cultural distance has a positive relationship with Chinese outward M&A performance.. Institutional (or political) distance Morck et al. (2008) concludes that any sensible economical analysis on the strategies of Chinese enterprises must take political, social and institutional factors into account. Political (or administrative) distance can be measured by the quality of institutions in a country. Institutions play a crucial role in an economy in order to ensure the effective functioning of market transactions without unnecessary risk and costs. An environment characterized by high institutional quality enhances acquisitions made by MNEs all over the world (Meyer et al., 2009). Emerging market MNEs participate in outbound M&As into countries with a more developed institutional environment will enhance performance. This is due to the fact that emerging market MNEs benefit more from a protected environment where relevant knowhow is shared. Outbound M&A by Indian firms to countries characterized by more developed institutions deliver significant positive value to their shareholders and hence create positive abnormal stock return. Thus, investors have confidence in companies that invest in markets with a sound institutional environment (Gubbi et al., 2009). The expectation is that Chinese investments in countries with higher institutional quality will enhance the value creation of the firm in question, hence, the third hypothesis will be:. 12.

(13) Hypothesis 3: higher institutional quality has a positive relationship with the performance of Chinese outward M&A.. Economic distance Acquisitions made by (Indian) emerging market MNEs into developed countries deliver higher value to shareholders than acquisitions made in non-developed countries (Gubbi et al. 2009). Tsang and Yip (2007) find out that economic distance matters for the success rates of cross-border acquisitions. In case of large positive economical distance, an MNE may acquire a target in order to get easy access to strategic resources, in order words the MNE may act out of resource exploration perspective. Acquisition have lower hazard rates than joint ventures and Greenfield investments in countries with large positive economical distance (Tsang et al., 2007). In order to measure the effect of economical distance in cross-border M&A activities on firm performance, Gubbi et al. (2009) studied 425 cross-border M&As made by Indian firms. Investments made by Indian emerging market MNEs into countries with positive economical distance produce significant positive abnormal stock returns, hence investors see those investments as value enhancing for the in question. Expected is that Chinese outward M&A in relatively richer markets may enhance the value creation for the owners of the firm. Hence:. Hypothesis 4: economical distance has a positive relationship with Chinese outward M&A performance.. An overview of the most relevant literature used in this paper is given in appendix A.. III. Research Methodology Data The Thomson One Banker database will be the main source for the data on M&A activities by Chinese firms. The Thomson One Banker database is a comprehensive database covering more than 790.000 M&A events from 1985 to present. Logically, the Thomson One Banker database is the data source of numerous papers investigating the effects of M&As. The following criteria are used to gather information on Chinese outward M&A activity:. 1. The home country of the acquirer will be China 2. From all possible target firm’s home countries China will be excluded. 13.

(14) 3. Deals must be complete within the period 01/01/1992 till 31/03/2011 4. The acquiring company must be listed at the time of the M&A activity, hence it must have a DataStream identifier number 5. The events windows cannot overlap, overlapping event window M&A activities are deleted from the dataset 6. The company must be listed for at least 260 days prior to the M&A event, in order to fulfil the estimation period requirements for the event study. The date of the announcement of the M&A activity will be used for the event study. In order to get stock price information the acquiring company will be matched with the relevant stock price data using DataStream. In total, data on 213 Chinese outbound M&A activities are gathered. M&A activities were conducted in 35 different countries from all over the world (details are listed in appendix B). Hong Kong and Macau are included in the data as foreign countries. Officially speaking these two regions are part of the Peoples Republic of China. However, Hong Kong and Macau have a special status, namely ‘special administrative region’. Under the "one country, two systems" policy, these two regions have their own legal, political, economical and financial policies. The different status of both Hong Kong and Macau have far reaching consequences, the two regions are even allowed to make their own cultural and commercial cooperation agreements with foreign countries. Hence, the characteristics of these regions differ significantly with the Chinese Mainland, in other words, we treat them as separate investment destinations. However, separate regressions will be presented, one including Hong Kong and Macau, and another omitting these two regions.. Time period The South China tour of Deng Xiaoping was more or less the start of the era of Chinese MNEs to appear in the world economy. Chinese investments abroad changed after 1992, both in term of magnitude and the spread of different targets (Buckley et al., 2007). Zhang (2009) calls the period 1992 – 2002 the ‘first wave of Chinese multinational corporations with a relatively large amount of overseas investment.’ The period after 1992 is characterised by a remarkably sharp increase in the investment made abroad by Chinese firms, moreover this period is characterised by a sharp increase in Chinese overseas M&A as well. The period 1992 till March 2011 is a logical choice to study the value creation of Chinese enterprises participating in outbound M&A activities.. Model The model used in this paper will take the following form:. 14.

(15) = +

(16) +

(17) +

(18) +

(19) + The dependent variable is represented by the cumulative abnormal returns, which measures the performance of the Chinese firm conducting an outbound M&A activity. CulDis is a explanatory variable measuring cultural distance. The explanatory variables measuring institutional and economical distance are InsDis and EcoDis respectively. Various firm and represents the error term which is normally distributed around a mean of zero.. country specific characteristics are controlled for with a set of relevant control variables. The. Dependent variable Company performance of Chinese companies conducting outbound M&A activities is taken as the dependent variable. In order to measure the performance of a firm scholars construct different measures. For instance the measures used by Chakrabarti (2009) and Morosini et al. (1998). Chakrabarti (2009) uses a long-term performance measure to study M&A performance, namely the buy-and-hold abnormal returns (BHAR). Morosini (1998) uses the percentage growth in sales in a two year period after the acquirer buys the target. Meier and Zollo (2008) investigated measures of M&A performance used by papers in top management en finance journals between 1970 and 2006. They found that short-term event study methods are the most common used method to study M&A performance. Shortterm event study methods measures the expectations of the market about the firm performance before and after the M&A. In this paper, company performance is calculated using a shortterm event study method, namely the cumulative abnormal return (CAR) analysis. The CAR analysis calculates the sum of the abnormal stock returns in and around the day that the relevant M&A activity is announced by the acquiring company. Stock returns of the firm in question will be mirrored against a benchmark representing the performance of the market as a whole. Abnormal returns will be measured, and taken together, the cumulative abnormal returns (CARs) will provide numerical data showing the expectations and confidence of investors in M&A activities. When investors expect that a cross-border M&A activity by a Chinese company will hurt the firm, they will translate their feelings and expectations into the returns of the stock price. Visa versa, if a investor perceives the M&A activity as positive, these positive expectations will be reflected in a positive price. The benchmark of the market is used to distinguish between M&A specific stock movements and the general market movements. When a M&A activity produces positive abnormal stock returns (above the general market returns), then investors (who are assumed to have the knowledge to make. 15.

(20) sensible forecast about the possible value creation of M&A activities) perceive M&A events as value enhancing for the firm in question. The market adjusted returns approach will be used to calculate the excess of stock returns over market returns (Chakrabarti et al., 2009): = − . = −1, +1#; = −11, +1#; = −21, +1#. The AR represents the abnormal return of the acquirer, calculated by the stock return of the. acquirer i ( ), and the return of market represented by the benchmark ( ). An estimation. period of 200 days from (-60,-260) is used for the CAR. In order to make the CAR analysis. more robust different benchmarks are used. In China there are different types of stocks traded at the stock exchanges. Different types of stocks are available for Chinese and foreign investors. Four different benchmarks are used to cover the expectations about performance of both Chinese and foreign investors, namely:. . The MSCI China (total return) index, this index consist of the a composite of H shares, B shares, Red Chip and P chip shares. H-shares are shares of Mainland Chinese companies which are listed on the Hong Kong Stock Exchange. B shares are listed in a foreign currency on the Shanghai and Shenzhen stock exchange. Red Chip stocks are provided by Mainland Chinese companies who are listed in Hong Kong and are incorporated outside Mainland China. P chip shares are companies run by private sector businessmen and are listed in Hong Kong. This benchmark includes the shares which are most easily traded by the international business world.. . The Shanghai Stock Exchange Composite Index. Both A and B shares who are traded in Shanghai are included in this index. A-shares are shares that are denoted in Renminbi (the currency of China).. . The Shenzhen Stock Exchange Composite Index, which includes the A and B shares listed in Shenzhen.. . The S&P/IFCI Daily China index, both the return index and the price index.. Adding the abnormal returns over the specific windows (namely the CAR(-1,+1), CAR(11,+1), and CAR(-21,+1)) one derives to the cumulative abnormal returns, defined as: &'()*) +,-+# =. .. &'()*) +,-+#. . 16.

(21) This event study methodology requires Chinese investors to evaluate the value of a Chinese outbound M&A activity, and translate the expectations of a M&A event into a positive or negative stock return. Chen et al. (2001) found out that, despite the young age of the Chinese market, investors in the Chinese market use accounting information in a rational and sophisticated way. In other words, relevant information is used to valuate companies and stock prices.. Exploratory (independent) variables Cultural Distance Cultural differences can be measured in many different ways. Bhagat et al. (2002) categorize culture among two different dimensions, namely horizontal/vertical and individualism/collectivism dimensions. Another concept making culture measurable are the project GLOBE dimensions (Javidan et al., 2005). However, among all the measures and constructs to capture culture in numerical values, the Hofstede dimensions still remain the undisputed leader (Chakrabarti et al., 2009). To see which impact cultural distance has on the performance of Chinese outbound M&A, the Kogut and Singh’s (1988) formula is used to calculate numerical values representing the differences in culture (Chakrabarti et al., 2009; Morosini et al., 1998). The measure include an overall value of the four orthogonal Hofstede dimensions, namely power distance, uncertainty avoidance, individualism and masculinity. The dimensions represent the following ideas:. . Power distance, a measure to capture the degree to which people in organisations accept and expect power from other ‘higher in the hierarchy’ people. Power distance is measured from a bottom-up perspective instead of a top-down perspective. The higher the value of this measure, the more people except and expect power from others.. . Individualism, this measure refers to the extent that people are expected to look after themselves and their direct family. On the contrary there is collectivism, the direct opposite of individualism. Collectivism measures the degree individuals are, from birth on, integrated and part of certain in-groups (like family including grandparents etc) and give loyalty to those in-groups.. . Masculinity, this construct captures the degree of distribution of roles between genders in a certain society. Masculine societies are somewhat more competitive and assertive, in contrast to feminine value based societies.. . Uncertainly avoidance, this measure deals with the tolerance within a society of ambiguity and uncertainty.. 17.

(22) Cultural distance calculated in the following way: 6.

(23) = /. 0123(0 − 451 # 7. CulDis represents the cultural distance. 451 is cumulative sum of the four Hofstede. measures of China, hence, 8123(0 is cumulative sum of the four Hofstede measures of the target its home country. The Hofstede scores are gathered from the official webside.4. Institutional distance In order to measure the institutional distance between China and the target home country we measure the difference in the scores of the Corruption Perception Index of Transparency International. These measure captures the degree of political and administrative corruption, in other words the degree of the quality of the institutions in a certain country. This measure ranges from 0 (very corrupt institutional environment) to 10 (very sound institutional environment). Data is gathered from the Transparency International official website.5. Economical distance In order to measure the difference between economic prosperity between a Chinese and a target country, the per capita GDPs are compared. Economical distance is calculated in the following way:

(24) =. 9 9

(25) : ; < =

(26) − 9 9

(27) : ; < ℎ

(28) 9 9

(29) : ; < =

(30) + 99

(31) : ; < ℎ

(32) . Data on per capita GDP will be gathered from World Economic Outlook database from the IMF.. Control variables can be divided into two groups, namely firm-specific and country-specific control variables.. 4. The official website of Hofstede: http://www.geert-hofstede.com/ The website the Corruption Perception Index of Transparency International: http://www.transparency.org/policy_research/surveys_indices/cpi/2010 5. 18.

(33) Firm-specific control variables The variable “Rel” will measure whether the acquiring company acquirers a target in a related industry (Lowinski et al., 2004). Relatedness is measures by similarity in the acquirer and the target Mid Industry codes. The Mid Industry code is defined by the Thomson Database as the proprietary mid-level industry classifications. This classification is based on the NAIC Codes, SIC Codes, and general company business description. This variable takes the form of a dummy variable, with a value of 1 if the acquisition is related and a value of 0 when it is not related. Data is provided by the Thomson One Banker database. Prior acquisition experience do enhance the value creation of an acquisition (Lamont and Reus, 2009). The dummy variable “AcqExp” will take the value 1 if a Chinese MNE has conducted more than one M&A activity during the period of research, and 0 if not. Data is provided by the Thomson One Banker database. We control for the fact whether the acquiring company owns a majority stake in the target company after the acquisition is made. A majority stake can bring all kinds of advantages, such as significant decision power over the target company its business strategy and decisions. This effect is measured by the dummy variable “Major” and has the value 1 if the acquirer has owns more than 50% of the target after the acquisition and the value 0 if not. Data is provided by the Thomson One Banker database. A often used control variable included in models measuring M&A performance is whether an acquisition is friendly or hostile (for example Chakrabarti et al., 2009). However, the dataset includes not one single hostile M&A deal. The question that then arises is whether the data is biased only to friendly deals. However, it can be said that in general, with only a few exceptions, cross-border M&A deals with Chinese acquirers are friendly (Jane et al., 2008). This is due to the difficulty of managing global organizations from a Chinese perspective, the high costs involved, and the risk related to outbound M&A activities. In other words, Chinese acquires minimize the cost and risk related to outbound M&A deal through making acquisitions in a friendly way. Hence, the sample used represents most probably a sound reflection of the population.. Country-specific control variables Ghemawat (2001) argues that geographical distance still matters in international business. We measure the effects of geographical approximation to China by using the control variable “GeoDis”. This variable represents the distance between the target and the Chinese capital city.. 19.

(34) Target companies in developed countries can bring all kinds of market and knowledge advantages. Gubbi et al. (2010) defines developed countries as the OECD countries, henceforth a dummy variable “OECD” is included, having the value 1 if the country is a member of the OECD and 0 if not. The target country “openness” to international trade may affect the ease in which an acquiring company can buy targets. This variable “Open” is measured by trade as a percentage of the GDP. Data is provided by the World Bank.. Appendix C provides an overview of the variables used in this paper.. IV. Results In order to check for heteroscedasticity a Breusch-Pagan/Cook-Weisberg test was conducted and heteroscedasticity was detected. Hence, the cumulative abnormal returns are calculated using Huber-White standard errors. When calculating the cumulative abnormal returns, one M&A event (of the Shanghai based eWorld Interactive Inc. acquiring the American Media & Technology Solutions Inc at 6 February 2010) showed a extraordinary high abnormal return. Appendix D shows a plot the cumulative abnormal return per event of the dataset, one outlier clearly shows up. After a closer look at the stock price fluctuations of the underlying stock prices of the outlier, it showed that this share exhibit quite unusual prices movements (fluctuations occur only a few time per month). It is questionable whether the abnormal returns are caused by a market reaction to the M&A announcement, or that there are other forces in this picture. Due to this outlier, two sets of results for the cumulative abnormal return analysis will be discussed, one set of results including the outlier and another without the outlier.. Results with the outlier included From the table one it is clear that both Mainland Chinese and non-Mainland Chinese investors forecast that Chinese outward M&A will add value to the company in question. How much value Chinese outward M&A activities will add precise is difficult to say. For the three day event period all the cumulative abnormal returns are significant at a p-value of less than 10 percent. The two wider event windows, namely CAR(11,+1) and CAR(-21,+1), insert two obvious changes relative to the small CAR(-1,+1) event period. The first change is that the cumulative abnormal stock return of Chinese outbound M&A activities are larger. The second change is related to the level of significance, instead of. 20.

(35) p-values smaller than 10 percent the larger event windows are all significant with p-values smaller than 5 percent (the majority of the p-values are between the one and two percent).. Event window. CAR(-1,+1) CAR(-11,+1) CAR(-21,+1). MSCI China index. Shanghai Stock Exchange Composite Index. Shenzhen Stock Exchange Composite Index. S&P/IFCI Daily China index: price index. S&P/IFCI Daily China index: return index. .0535379* (.0322225) .0812826** (.0346376) .081148** (.0352171). .0559918* (.0322473) .0848411** (.0344369) .0807498** (.0353776). .0550598* (.0321599) .0817208** (.0343255) .076814** (.0351754). .0536734* (.0321854) .0799161** (.0345512) .0809888** (.0350262). .0536889* (.0321845) .0798923** (.0345308) .0810358** (.0350098). * p-value < 0.1, ** p-value < 0.05, *** p-value < 0.01. Table one: CAR analysis of 213 Chinese outbound M&As in the period 1992 - March 2011. The results of the twenty-three event window will now be elaborated in detail. The cumulative abnormal return of the Chinese firms conducting outbound M&A are all significant at a pvalue of less than 5 percent. Measured against the MSCI China index as a benchmark, Chinese MNEs making M&A investments abroad perform 8.1% better than the benchmark. Measured against the Shanghai Stock Exchange composite index, Chinese companies participating in international M&A activities perform roughly 8.1% better than the market in general. Measured against the Shenzhen Stock Exchange composite index, the performance is roughly 7.7% better. The cumulative abnormal return that Chinese outbound M&A activities deliver equal to 8.1% when taking the S&P/IFCI Daily China index into account. Result of other event windows can be explained in a similar way. Obvious to see from table one is that every event window exhibit positive cumulative abnormal returns. Moreover, important to notice is that the 95 percent confidence intervals of the two wide event periods ( the CAR(11,+1) and CAR(-21,+1) ) only entails positive values.. Results with the outlier excluded Table two represents the cumulative abnormal returns when the outlier (the M&A event of the Shanghai based eWorld Interactive Inc. acquiring the American Media & Technology Solutions Inc at 6 February 2010) is excluded. Clearly, including the outlier would result in a overestimation of the aggregate cumulative abnormal return, since the numbers provided in table two are remarkable lower than those provided in table one. Moreover, the significance increases when the outlier is excluded (overall, the numbers provided in table two have lower p-values).. 21.

(36) Event window. CAR(-1,+1) CAR(-11,+1) CAR(-21,+1). MSCI China index. Shanghai Stock Exchange Composite Index. Shenzhen Stock Exchange Composite Index. S&P/IFCI Daily China index: price index. S&P/IFCI Daily China index: return index. .0226919** (.0093615) .0573339** (.0251428) .0668145** (.0323203). .0250679*** (.0091865) .0607689** (.0247421) .0656162** (.0321285). .0242429*** (.00924) .057868** (.0248004) .062421* (.0322477). .0228648** (.009357) .0559172** (.0249738) .0667017** (.032131). .0228819** (.009359) .0559234** (.0249744) .0667903** (.0321317). * p-value < 0.1, ** p-value < 0.05, *** p-value < 0.01. Table two: CAR analysis of 212 Chinese outbound M&As in the period 1992 - March 2011. In contrast to the data including the outlier, the three day event window (CAR(-1,+1)) becomes now significant at a p-value lower than five percent. The value of the abnormal returns are notably lower, between the 2.2 and 2.5 percent. The two other event windows, the CAR(-11,+1) and CAR(-21,+1) windows, include lower cumulative abnormal returns as well. This effect is in line with the expectations since the outlier showed an unrealistic high CAR. Overall, the significance of the analysis increases for the three event window and for the CAR(-11,+1) with the Shanghai Stock exchange benchmark. Based on the output of table two it is obvious that investors perceive Chinese outbound M&A as value creating for the firm in question, regarding the positive CARs. Moreover, most of the 95 percent confidence intervals measured over all the three event windows exhibit only positive values. However, it is difficult to say exactly how much cumulative abnormal returns are created by Chinese outbound M&A activities in general. In short, the data used provide strong evidence in favor of hypothesis one, namely that Chinese outbound M&A will generate positive value for the owners of the firm in question.. Results without Hong Kong and Macau (outlier excluded) Hong Kong and Macau together make up for 66 M&A events during our sample period (see appendix B). Officially, Hong Kong and Macau make part of the Chinese Mainland, however both regions are “special administrative regions” (see the data part in the Research Methodology section). In order to test whether our results are robust in the absence of Hong Kong and Macau, table three presents CAR regression outcome when both regions are excluded from the sample data. From table three we see two changes with table two. The first change is in the magnitude of the cumulative abnormal returns, they tend to decrease a little compared to table two. The second change is a small decrease in significance, p-values increase a little. However, in general, the conclusions about the positive cumulative abnormal returns is supported, also in the absence of the regions Hong Kong and Macau from our dataset.. 22.

(37) Event window. CAR(-1,+1) CAR(-11,+1) CAR(-21,+1). MSCI China index. Shanghai Stock Exchange Composite Index. Shenzhen Stock Exchange Composite Index. S&P/IFCI Daily China index: price index. S&P/IFCI Daily China index: return index. .0185861** (.0087305) .0669411* (.0340939) .0724904* (.0423206). .0223021** (.0085585) .0716614** (.0335895) .0733552* (.0423319). .0213573** (.0085978) .0686392** (.0336715) .069551 (.0424772). .0185937** (.0088145) .0650051* (.0339108) .0710102* (.0420937). .0186138** (.0088163) .0650159* (.0339106) .071127* (.0420964). * p-value < 0.1, ** p-value < 0.05, *** p-value < 0.01. Table three: CAR analysis, without Hong Kong and Macau, 146 Chinese outbound M&As in the period 1992 March 2011. The effect of cultural, institutional and economic distance In order to check for heteroscedasticity in the model, Breusch-Pagan/Cook-Weisberg test were conducted and it turns out that heteroscedasticity is present. Hence, the regressions in the different models are calculated using Huber-White standard errors. To check for multicolinearity problems table four provides the relevant correlation matrix. In order to see whether the dependent variable is normally distributed, a histogram of the cumulative abnormal returns is created and the shape of the histogram provides prove for a normally distributed dependent variable (the histogram is included in appendix E). An overview of the different robustness measures is provided in appendix F. Two sets of models are created, namely one set including Hong Kong and Macau, and another set excluding these two regions. Model one and two measures the effects of cultural, institutional and economical distance when Hong Kong and Macau are included as foreign investment destinations, the regression outcome is provided in the tables five and six. Tables seven and eight represent the regression outcome omitting Hong Kong and Macau.. culdis insdis ecodis exp rel major oecd open geodis. open geodis. culdis. insdis. ecodis. exp. rel. major. oecd. 1. 0000 -0. 1311 -0. 0302 -0. 0323 0. 0928 -0. 1096 0. 6068 -0. 4962 0. 3657. 1.0000 0.8037 - 0.0892 - 0.0076 0.0993 0.1309 0.4714 - 0.2068. 1.0000 -0.0376 0.0068 0.1478 0.2145 0.2825 -0.1018. 1.000 0 0.122 8 -0.109 0 -0.015 9 0.005 5 0.046 4. 1.0 000 -0.0 163 0.1 611 -0.1 570 0.1 658. 1 .0000 -0 .0221 0 .0848 -0 .1548. 1.0000 - 0.7731 0.6759. open. geodis. 1. 0000 -0. 7747. 1.0000. Table four: correlation matrix of the explanatory and control variables. 23.

(38) Model one. CAR. Cultural distance Institutional Distance Economic distance Experience. -.0021634** (.0008711). Relatedness Majority stake OECD Openness Geographical distance Constant R-squared Number of observations. CAR. CAR. .0266988 * (.0151339). -.0354478 (.034612) -.0403301 (.0372886) -.001451 (.0389893) .0568548 (.0455636) .0000864 (.0001538) 4.72e-06 (4.99e-06) .0577453 (.072624) 0.05 152. -.0372921 (.0335388) -.0393095 (.0364272) .0145938 (.0378263) -.1023269 (.0789585) -.0002733 (.0002654) 6.04e-06 (4.79e-06) -.0455659 (.0564732) 0.04 155. .0233399 (.0967932) -.0325025 (.0333793) -.0353516 (.0362198) .0068754 (.0385991) -.0100123 (.0678468) .000049 (.0002088) 5.00e-06 (4.88e-06) -.0010319 (.0659669) 0.02 154. * p-value < 0.1, ** p-value < 0.05, *** p-value < 0.01. Table five: regression using the CAR(-11,+1) based on the MSCI benchmark. Model two. CAR. Cultural distance Institutional Distance Economic distance Experience. -.001536** (.000696). Relatedness Majority stake OECD Geographical distance Constant R-squared Number of observations. CAR. CAR. .0122032* (.0067243). -.0318119 (.0270529) -.0276169 (.0283184) -.0267766 (.0306115) .049815 (.0308181) 3.71e-07 (3.14e-06) .0970611*** (.036629) 0.04 189. -.0290877 (.0263163) -.0290957 (.0276274) -.0135519 (.0289217) -.0108251 (.0306076) 3.40e-06 (3.36e-06) -.0455659 (.0564732) 0.03 195. .0442513 (.0528498) -.0302556 (.0264493) -.0274073 (.0277508) -.0140245 (.0292647) -.0014909 (.0295973) 1.79e-06 (3.45e-06) .0206927 (.0448836) 0.02 194. * p-value < 0.1, ** p-value < 0.05, *** p-value < 0.01. Table six: regression using the CAR(-11,+1) based on the MSCI benchmark. 24.

(39) Model three. CAR. Cultural distance Institutional Distance Economic distance Experience. -.0021907** (.0010219). Relatedness Majority stake OECD Openness Geographical distance Constant R-squared Number of observations. CAR. CAR. .0323195** (.0157213). -.0223157 (.0515456) -.0287476 (.0527393) .0357113 (.0520711) .0490747 (.0514512) .0001353 (.0001718) 5.01e-06 (5.44e-06) .0188708 (.0866678) 0.07 90. -.0295545 (.0488731) -.0272423 (.0505333) .0500435 (.0502725) -.1431057* (.0856809) -.0004507 (.0002798) 6.25e-06 (5.16e-06) -.1250439 .0809025 0.06 93. -.0032874 (.1005932) -.017882 (.0471089) -.0202024 (.050804) .0448357 (.0512663) -.0009272 (.0719529) .0000442 (.0002317) 6.23e-06 (4.97e-06) -.0477641 (.0641588) 0.02 93. * p-value < 0.1, ** p-value < 0.05, *** p-value < 0.01. Table seven: regression using the CAR(-11,+1) based on the MSCI benchmark, without Hong Kong and Macau. Model four. CAR. Cultural distance Institutional Distance Economic distance Experience. -.0015353** (.0007296). Relatedness Majority stake OECD Geographical distance Constant R-squared Number of observations. CAR. CAR. .0143749* (.0074701). -.0222842 (.0331645) -.0189476 (.0337544) -.0116375 (.0374851) .045645 (.0333783) 1.57e-07 (3.39e-06) .0820247* (.0488567) 0.04 124. -.0191649 (.0315185) -.0210804 (.0328165) .0060768 (.034685) -.0253521 (.0358142) 3.11e-06 (3.48e-06) -.0692513 (.057065) 0.03 130. .0372191 (.0570019) -.022201 (.0318529) -.0179806 (.0335263) .003142 (.0355336) -.0006158 (.032051) 1.92e-06 (3.48e-06) .0014126 (.0451633) 0.01 130. * p-value < 0.1, ** p-value < 0.05, *** p-value < 0.01. Table eight: regression using the CAR(-11,+1) based on the MSCI benchmark, without Hong Kong and Macau. 25.

(40) From table four, one can see that the explanatory variables institutional distance (insdis) and economical distance (ecodis) are highly correlated. Besides that, the variables OECD (oecd) and openness (open) show high correlation coefficients. In order to overcome these correlation problems, separate regression will take place for each explanatory variable. Moreover, two models will be used, one including the variable open and another omitting the variable “open”. Model one, including the control variable “open”, is presented in table five. Model two, omitting the control variable “open”, is included in table six. The results from table one show a negative and significant (at a p-value < 0.5 level) for cultural distance. The sign of the coefficient for cultural distance is in contrast with our expectations. From the literature review a positive effect of larger cultural distance was expected. However, the data points out the opposite way, namely a negative effect of cultural distance. Important to notice is that the coefficient of cultural distance exhibits a rather small value. In other words, the effects of cultural distance on the performance of a Chinese M&A deal, as perceived by the shareholders, is more or less negligible. When the highly correlated variable “open” is omitted, the effect of cultural distance further diminishes. Hypothesis two, namely that cultural distance has a positive relationship with Chinese outward M&A performance, is not supported by the data. Cultural distance in negatively correlated with Chinese outward M&A performance, but the size of the negative coefficient is negligible. The effect of institutional distance is significant and positive. Both model one and two find a positive relationship between institutional quality of a certain country and the performance of Chinese outward M&A activities. Shareholders of Chinese firms conducting those M&A activities perceive investments in countries with sound institutional quality as positive. This effect is significant at a p-value of less than 10%. The size of the coefficient of institutional distance is rather small. However, overall it can be stated that hypothesis two, namely that higher institutional quality has a positive relationship with the performance of Chinese outward M&A, is supported by the data. It turns out that both models produce a insignificant effect of economic distance on the performance of Chinese outbound M&A activities. Henceforth, hypothesis three, namely that economic distance has a positive relationship with Chinese outward M&A performance, is not supported by the data. Models three and four (tables seven and eight) explain the effect of cultural, institutional and economical distance in the case of absence of Hong Kong and Macau. The coefficients increase slightly in magnitude and the significance of the exploratory variables increases a bit. However, the effects remain similar to that of models one and two. In model three, the coefficient of the variable “OECD” becomes significant in case of institutional distance. In. 26.

(41) contrast to our expectations the variable “OECD” has a negative sign. However, this variable is significant at a p-value of 0.99. Moreover, this variable is insignificant in all the other regressions. Hence, it is save to conclude that it makes little difference for a Chinese company to invest in an OECD country in particular or not. Cultural distance has still a minor negative relationship to outward M&A performance. A better institutional environment is associated by increased M&A performance. The coefficient of economical distance remains insignificant. Regressions based on other benchmarks show similar results.. V. Discussion The results of our analysis are in line with the rich stream of literature proving that crossborder M&A activities improve performance of the MNE in question (for example: Harris et al., 1991 for Swiss cross-border M&A; Lowinski et al., 2004 for US cross-border M&A; Gubbi et al., 2009 for Indian cross-border M&A). In line with Gu and Reed (2010) we find that Chinese outward M&A contribute to the value of the Chinese firm, measured in terms of cumulative abnormal returns. The positive cumulative abnormal returns are robust with and without the inclusion of Hong Kong and Macau in our dataset. Investors show confidence in the motivations of Chinese enterprises to go abroad. Motivations of Chinese firms to go abroad include the acquisitions of advanced managerial knowledge and business practises, to acquire access to rich markets, and to safeguard import of natural resources (Morosini et al., 1998; Kolstad and Wiig, 2010). Inspired by the CAGE model of Ghemawat (2001) the relationship between macro economic variables and Chinese outward M&A performances are investigated. The CAGE distance framework consists of cultural, administrative (or institutional), geographical and economic distance. Based on the finding of our study the effects of these distances are at best minimal. The negative effect in cultural distance is to small to take into account. Chakrabarti et al. (2009) find a more or less similar negative and small result of cultural distance when the CAR analysis is employed, instead of the BHAR (buy-and-hold abnormal return) method, for cross-border M&A activities. However, Chakrabarti et al. (2009) find a positive significant effect of cultural distance using the longterm BHAR model. Hence, future research could fill this gap by analysing Chinese outward M&A through the use of a BHAR analysis. In line with our expectations and literature (Gubbi et al., 2009 and Meyer et al., 2009), an environment characterized by high institutional quality enhances the M&A activities made by MNEs and lead to higher performance of the M&A activities. The sign of the coefficient of the institutional variable in all four models confirm. 27.

(42) the statement about a positive relationship between institutional quality and Chinese outward M&A performance. It turns out that investors of Chinese firms have confidence in M&A deals aiming at targets in countries with sound and developed institutional systems. Our findings do not show a significant link between geographical distance and M&A performance. However, it is obvious from our dataset that Chinese companies choose investment destinations close to China. Hong Kong is home of most of the target of Chinese companies. Moreover, of the dataset of 213 M&A deals, 108 deals involve targets from Asia. In short, although the variable representing geographical distance is insignificant in our models, geographical distance should not be neglected when researching Chinese M&A in general. We find no significant relationship between economic distance and Chinese outward M&A performance. A major limitation of this paper could be a lack of efficiency of the Chinese equity markets. The cumulative abnormal return analysis requires that investors in the Chinese stock markets incorporate information effectively into the relative stock prices. Chen et al. (2001) conclude that investors in the Chinese market use accounting information in a rational and sophisticated way, despite the young age of the Chinese market. Moreover, the Chinese stock markets become more efficient over time during the nineties of last century and more integrated in the world economy (Laurence et al. 1997). Although the efficiency of the Chinese stock markets are far from being perfect, our opinion is that both the Shanghai and Shenzhen stock exchanges behave efficient enough for an event study to produce meaningful results.. VI. Conclusion An important question of investors is whether Chinese outbound M&A activities create a positive return. It turns out that Chinese outbound investments produce significant cumulative abnormal stock returns. Hence, in the past investors expected that companies which expanded abroad are conducting more fruitful business activities than the Chinese market as a whole. Which macro economic factors insert an influence on the performance of Chinese outbound M&A activities remains unclear. This paper found a marginal negative effect of cultural distance, and a somewhat larger positive effect of institutional quality. More research is needed on this topic to provided more clear answers of the failure and success factors related to Chinese outbound M&As. In the future, when there is more Chinese M&A and stock price data available for a longer time period, event study models like the BHAR (buy-and-hold abnormal returns) and the. 28.

(43) CTAR (calendar-time portfolio returns) are sound models to see whether the short run predictions of the CAR analysis are consistent in the long run (using BHAR or CTAR). Moreover, the availability of more firm-specific variables about the Chinese companies conducting M&A deals would increase the accuracy and predictive power from the research about the performance of Chinese M&As. At this stage, firm-specific data about Chinese M&A deals is largely incomplete, which puts a large limit on the firm-specific variables to include in the models investigating this topic. Once more data is available, more studies about the performance of Chinese outbound M&A activities can fill the current research gap in this area.. References Bhagat R.S., Kedia B.L., Harveston P.D., Triandis, H.C., (2002) Cultural variations in the cross-border transfer of organizational knowledge: An integrative framework. Academy of Management Review 27:204-221.. Buckley P. J., Clegg L. J., Cross A. R., Liu X., Voss H., & Zheng, P. (2007) The determinants of Chinese outward foreign direct investment. Journal of International Business Studies, 38(4): 499-518.. Chakrabarti R., Gupta-Makherjee S., Jayaraman N., (2009) Mars-Venus marriages: Culture and cross-border M&A. Journal of International Business Studies. 40: 216-236. Chen C.J.P., Chen S., Su X. (2001) Is accounting information value-relevant in the emerging Chinese stock market? Journal of International Accounting, Auditing and Taxation 10: 1-22. Cheung Y., Qian X., (2009) Empirics of China’s outward direct investment. Pacific Economic Review 14(3): 312-341. Dunning J. H., Lundan S. M. (2008). Multinational Enterprises and the Global Economy, Second Edition. Cheltenham: Edward Elgar Chapter 4. Ghemawat P. (2001) Distance still matters: The hard reality of global expansion. Harvard Business Review, 79(8): 137-147.. 29.

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(47) Appendix A: Most relevant papers Authors (year of publication) Buckley, Clegg, Cross, Liu, Voss, Zheng. Sample specification Chinese FDI (19842001). Dependent variable(s) Annual outflow of Chinese FDI. Chakrabarti, GuptaMukherjee, Jayaraman (2009). 800 cross-border acquisitions (19912004). Buy-and-hold abnormal returns (BHAR), CAR. Gu, Reed (2010). 145 outbound M&A events with Chinese acquirers (1994-2008). CAR. Explanatory variables. Major findings. Main: Host country GDP, Host country GDP per capita, Annual percentage increase in GDP, natural resource endowment, assetseeking FDI, political risk, cultural proximity to China, policy liberalization Control: exchange rate, host country inflation rate, exports, imports, geographic distance from China, openness to FDI Main: Hofstede measures (cultural distance) Control: friendly dummy, tender dummy, cash dummy, number of bidders, acquirer size, economic disparity, openness target nation, foreign exchange rate volatility, bilateral trade, corporate governance measure, religion dummy, language dummy, legal dummy Government-owned enterprise dummy, natural and energy industry sector dummy, technology industry dummy, headquartered in Hong Kong dummy, relatedness dummy. The paper investigates the different motives behind Chinese FDI. Chinese FDI flows to destinations characterized by high political risk, and cultural proximate to China, with a large host market size and geographic proximity during the period 1984-1991. Natural resource seeking FDI becomes significant during 1992-2001 After controlling for several firm-specific and country-specific variables a positive relationship between cultural distance and performance is found. The study find evidence that Chinese outbound M&A activities create positive abnormal returns, and hence create shareholder value. 33.

(48) Gubbi, Aulakh, Ray, Sarkar, Chittoor (2009). 425 cross-border Indian M&A events (2000-2007). CAR. Kolstad, Wiig (2010). Chinese FDI (20032006). Annual inflow of Chinese FDI. Luedi (2008). 56 outbound M&A events with Chinese acquirers (1995-2007). Morosini, Shane, Singh (1998). 52 cross-border M&A activities from with Italian acquirers, 1987-1992. Proportion overpaid: the proportion in which the CAR was negative. Deal value added Percentage rate of growth in sales over two year period following the M&A event. Reus, Lamont (2009). 118 acquisitions by 118 US companies, 1998-2000. CAR and a subjective measure based on a score derived from a questionnaire. Main: developed market acquisitions, economic distance, institutional distance Control: firm size, firm age, average net profit margin, average export intensity, average leverage, annual market capitalization, foreign subsidiary, private target, business group affiliation, manufacturing sector Host country GDP, total import and exports as share of GDP, inflation rate, distance between capital of host country and China, rule of law, metals and ores and fuels as share of GDP A McKinsey Quarterly report, only calculating the CAR. Main: Overall measure of the four Hofstede dimensions (cultural distance) Control: Industry relatedness, firm size, post-acquisition strategy, uncertainty avoidance, year of acquisition, industry of acquiring company Main: Cultural distance as measured by GLOBE data, understandability, communication, key employee retention Control: experience, prior performance, relatedness, size, autonomy provision, time dummy. Cross-border M&A activities conducted by Indian firms lead to positive abnormal stock returns. Moreover, acquisitions in OECD and in countries with advanced institutional environments lead to even more positive abnormal stock returns. OECD countries attract market seeking Chinese ODI, non-OECD countries with poor institutions attract resource seeking Chinese ODI. Chinese companies performed less well than Western companies in the period 1995-2007 Positive (significant) relationship between national cultural distance and crossborder acquisition performance. Significant negative relation between cultural distance and firm performance. However, on the other hand a positive relationship between cultural distance and performance if cultural distance is combined with understandability and communication. The effect are marginal in magnitude. 34.

(49) Stahl, Voigt (2008). A meta-analysis of 46 studies, including a combined sample size of 10,710 M&A events. Three dependent variables, namely sociocultural integration outcomes, synergy realization (mainly based on accounting-based measures), and shareholder value (CAR). Main: Hofstede measures for cultural distance Moderator: degree of relatedness, dimension of cultural differences (national or organizational) Control: Relative size, time of measurement. The effect of cultural distance on the dependent variables is often small in magnitude. There is no clear conclusion on the sign of the effect, how cultural distance effects the dependent variables remains unclear. 35.

(50) Appendix B: M&A activity per country Target nation. Number of M&As. Argentina. 1. Australia. 18. Azerbaijan. 1. Belgium. 1. Brazil. 3. British Virgin. 13. Canada. 7. Cayman Islands. 2. Denmark. 1. Egypt. 1. France. 2. Germany. 5. Hong Kong. 65. Hungary. 3. India. 2. Indonesia. 2. Italy. 2. Japan. 7. Macau. 1. Malaysia. 1. Mongolia. 3. Netherlands. 2. New Zealand. 2. Nigeria. 1. Peru. 1. Portugal. 1. Russian Fed. 2. Singapore. 11. South Africa. 1. South Korea. 6. Switzerland. 1. Taiwan. 5. Thailand. 2. United Kingdom. 2. United States. 35. 36.

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