Foreign vs domestic ownership on debt reduction: An investigation of acquisition targets in Italy and Spain

Vassiliki Bamiatzi,Georgios Efthyvoulou,Liza Jabbour

doi:10.1016/j.ibusrev.2017.01.008

Vassiliki Bamiatzi, Georgios Efthyvoulou + Show 1 more

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https://doi.org/10.1016/j.ibusrev.2017.01.008

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Abstract

This paper examines the role of foreign versus domestic ownership in reducing the debt levels of acquired firms in Italy and Spain over the period 2002–2010. Acknowledging that lower debt levels can mitigate the risk of failure and thus enhance the chances for a positive post-acquisition performance and survival, we particularly examine the causal effect of foreign and domestic acquisitions on two firm-level debt measures: gearing and short-term leverage. To estimate causal relationships, we control for selection bias by applying propensity score matching techniques. Our results indicate that foreign acquisition leads to a significant and steady reduction in the debt ratios of the target companies. In contrast, the relationship between domestic acquisition and debt reduction appears to be smaller and statistically less robust.

Highlights

IntroductionWe examine the influence of foreign ownership on debt reduction of acquisition targets
In the current paper, we examine the influence of foreign ownership on debt reduction of acquisition targets
We find that acquirers in general and foreign acquirers in particular are in a better shape in terms of capital structure than the targets; that is, firms acquired by foreign investors exhibit significantly higher debt ratios compared to these investors

Summary

Introduction

We examine the influence of foreign ownership on debt reduction of acquisition targets. While the extant literature is rather restricted to the implications of foreign ownership on profitability, we focus instead on the changes in debt ratios of a target company after a takeover deal. From a resource based view, firms owned by foreign firms, typically large ones, can benefit from firm-specific advantages of the parent company, -- i.e. technological expertise, networking, access to capital etc. From an agency point of view, foreign firms are assumed to be better monitored and controlled, presenting an overall more robust financial performance (Jensen and Meckling, 1976, Thomsen and Pedersen, 2000). Industry and country specific factors (Barbosa and Louri, 2005, Globerman et al, 1994), high agency costs (Demsetz and Villalonga, 2001) and institutional factors (Heugens et al, 2009) have been reported to offset the benefits of foreign ownership

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