The Impact of Nation-Level Institutions on Acquisition Premiums

Abstract

Institutional theory argues that institutions shape organizational decisions in uncertain contexts. Since acquisition negotiations are mired in uncertainty, we expect institutions to influence such negotiations, and the resulting bid premiums. Perhaps surprisingly, though, relatively little work has taken an institutional theory approach to explaining acquisition premiums. Accordingly, we draw on institutional theory to derive a set of cognitive, normative, and regulatory nation-level institutional forces that may shed light on premiums offered. In the case of cognitive institutional forces, we hypothesize that other firms’ prior premium decisions influence premiums offered in focal acquisitions—although we expect they will exercise a weaker influence when prior premiums greatly deviate from each other, as larger deviations weaken prior premiums’ role as a taken-for-granted reference. We also argue that normative forces in the form of the cultural values uncertainty avoidance and future orientation affect bid premiums, as they influence how firms deal with the uncertainty and payoff time inherent to acquisitions. Lastly, we propose that regulatory pressures through a country’s rule of law influence premiums, since it affects a firm’s confidence in its regulatory environment. We employ a large sample of 23,059 acquisitions in 42 countries from 1997 to 2017, and find support for our hypotheses.