Does cheap electricity in a target's location add value to the acquirer? Evidence from China

Abstract

Domestic cross-region mergers and acquisitions (M&A) are a popular corporate investment behavior. Merger and acquisition activity can have a great impact on the value of both firms involved in the transaction; market investors will buy and sell shares of the target and acquiring firms involved in M&A activity as a way to express whether they are optimistic about the success of the transaction. By analyzing the electricity price differences between targets' and acquirers' locations in nonlocal M&A activity in China from 2010 to 2017, and applying Fama-French three-factor and five-factor models, we find that many M&A transactions use the comparative advantages of lower electricity prices in the target's location, and market investors highly value M&A transactions driven by electricity price differences. The value placed by investors on these transactions is higher still when both the acquirer and the target are high electricity-intensive firms. Our work is among the first to rigorously analyze domestic cross-region M&A activity from the perspective of differential electricity prices between the targets' and acquirers' locations. We provide policy implications on how a less developed area with rich and cheap energy resources could use comparative advantages to promote economic development and boom the power market by M&A.