The investment environment and cross-border merger and acquisition premiums

Abstract

We study how a country’s investment environment affects cross-border merger and acquisition premiums. By combining several existing country-level indices, we provide empirical evidence that stronger measures of legal and regulatory standards, investor protection, and corporate transparency in the target firm’s country lead to higher premiums. The results indicate that managers of acquiring firms are willing to pay a higher premium to acquire foreign targets when the risks of failing to achieve merger synergies are lower. Hence, the market for corporate control may not be an effective substitute for a formal legal and regulatory system that protects shareholders.