Risky Reputations: The Role of CSI in Cross-Border Acquisitions

Abstract

This study examines the influence of reputation risk on ownership choice in cross-border acquisitions (CBAs). Building on internalization theory and the reputation literature, we argue that acquirers with higher reputation risk through involvement in corporate social irresponsibility (CSI) obtain lower levels of ownership in foreign targets, as CSI implies damage to their firm- specific advantages (FSAs). We suggest that in a cross-border context acquirers obtain lower levels of ownership to take advantage of the target firm’s legitimacy in the host market and reduce the likelihood of regulatory scrutiny and stakeholder resistance. However, the negative effects of acquirer reputation risk on the level of ownership in CBAs are contingent on characteristics of the target firm’s country. We find support for our hypotheses in a sample of 17,362 CBAs by 11,136 unique acquirers from 84 countries of target firms located in 67 countries.