Operating Performance of Emerging Market Acquirers: Corporate Governance Issues

Abstract

This study examines whether from the late fifth to the peak of the recent sixth acquisition wave, acquiring firms in emerging economies created operating performance following transactions. The authors analyze whether the degree of threat from corporate governance and the legal environment influences value creation. Based on ninety-eight merger and acquisition deals from 1998 to 2006, this paper concludes that emerging market acquirers typically have good operating performance before transactions occur, but that the average adjusted operating performance over a three-year period following a merger transaction shows little improvement. In addition, the square relationship that exists between postacquisition performance and the level of ownership concentration provides evidence to support both the incentive and the tunneling effects of large shareholders. Furthermore, there is no significant difference in performance improvement related to the legal framework of the acquirers' home countries, but the legal quality of target nations does have an impact on acquisition performance. Finally, our results on firm-specific governance mechanisms complicate the usefulness of audit committees on company boards but support the crucial role of independent directors. The results for country-specific legal systems confirm that a secure legal environment can help curb the practice of using ownership to extract private benefits and lead to better performance by emerging market acquirers, although legal enforcement from public institutions that is too strong reduces value.