Political risk and the factors that affect international bids

Abstract

This study examines the determinants of bidder returns, target premiums and the likelihood of winning a bid in cross-border acquisitions. We identify how risk associated with the target home country affects these outcomes. Expected improvement in efficiency is the more powerful factor explaining the variation in premiums, while returns to bidders reflect the information asymmetry. Foreign targets are more likely to accept first or lower bids if target countries are culturally close to the U.S. Targets in poor-governance nations are more likely to accept a lower bid, explained by the ability of a good-governance nation acquirer to create benefits for the target.