How Generalized and Arbitrary Institutional Inefficiencies Shape Equity in Acquisitions

Abstract

Institutional inefficiencies are likely to lead firms to approach ownership in cross-border acquisitions more carefully, possibly undertaking only a partial equity stake on the target firms. However, the majority of the multinationals entering Latin American countries do so by means of full acquisitions rather than partial acquisitions despite the local institutional voids. We argue that it is not only the extent of institutional inefficiencies that matter but also the type of inefficiency. Specifically, whether they are of a generalized or pervasive, and thus of a predictable type, or of an arbitrary, and thus uncertain and unpredictable type. We show the effects of the two types of institutional inefficiencies on the ownership acquired in 1,140 cross-border acquisitions (CBAs) by firms entering Latin America countries. We argue that while pervasive or predictable institutional inefficiencies have little effect on the ownership stakes, the arbitrary or uncertain inefficiencies positively influence the ownership acquired in CBAs, such that firms tend to undertake full acquisitions of the target. We extend on the idea that there is a pervasive and an arbitrary element in an array of institutional inefficiencies.