The role of dividend policy in cross-border mergers and acquisitions

Abstract

Recent studies show that characteristics of mergers and acquisitions (M&A) between U.S. firms depend on the dividend policies of bidders and targets in accordance with predictions of asymmetric information, catering, and clientele theories. We extend these findings by using variation in shareholder protection and link dividend policy to cross-border M&A deal characteristics using agency theory. After confirming the agency-based predictions of the outcome model of dividends within the context of our sample, we show that the dividend-paying statuses of bidders and targets affect the method of payment, the bid premium, and the future dividend policy of the combined entity in cross-border deals, and that the effects are often different from the previous findings in the U.S. deals. Our paper also shows that the firm-level dividend policy status of bidders and targets provides insight on M&A characteristics beyond those identified in prior studies using only differences in country-level governance measures.