Do cross-border and domestic bidding firms perform differently? New evidence from continental Europe and the UK

Abstract

In this paper we investigate the main features of the domestic and cross-border corporate acquisitions involving 38 European countries in the period 2003–2010. The analysis is based on characteristics of takeover transactions such as type of transaction, payment method, legal status of the target firm, activity relatedness, amongst other factors. In addition, we investigate the short-term wealth effects of 2821 European mergers and acquisitions initiated by large and medium-sized European firms. We find that, upon announcement, domestic acquiring firms earn higher abnormal returns than cross-border bidders. Domestic bidders’ outperformance holds even when controlling for different bid and firm characteristics such as method of payment, type of transaction, public status of the target firm, and activity relatedness of the target and the bidder. We find larger short-term wealth effect of foreign firms bidding on Continental European targets than those of foreign firms acquiring companies in the UK/Ireland. Our analysis shows that cross-border bidding firms tend to experience lower announcement returns when targets are located in countries with stronger investor protection mechanisms, suggesting that acquirers must compensate target firm shareholders (that is, pay higher premiums) if the quality of the corporate governance is reduced.