Target Firms Research Articles

Cultural tightness–looseness and inter‐regional mergers and acquisitions: Evidence from China

AbstractWe investigated the role of culture in inter‐regional mergers and acquisitions (M&As) within national borders, using a dataset that includes M&As conducted by Chinese listed firms from 2005 to 2019. Our research provides compelling evidence that the likelihood of an acquirer initiating a merger proposal – and the subsequent probability of reaching an agreement – decreases as the cultural tightness gap between the acquiring and target firms widens. Furthermore, we found that this negative impact of cultural tightness distance is more pronounced in non‐state‐owned firms and firms led by younger CEOs.

Overlapping insiders and the method of payment in acquisitions: New tests and evidence on adverse selection

Exploiting a unique setting of overlapping insiders between acquirers and targets in India, we examine how information asymmetry between the transacting parties influences the returns to acquiring firms' shareholders, as well as the method of payment. Using a novel dataset, we find that cash-financed deals generate greater (no significantly different) value for acquiring firms’ shareholders than stock-financed ones when insiders are non-overlapping (overlapping) between acquiring and target firms. Further, stock-financed deals with overlapping insiders outperform those without them. These results indicate that the adverse selection effect of stock issues in stock-financed acquisitions with asymmetric information between the transacting parties is the key reason behind the underperformance of stock-financed deals. We also find that acquisitions with overlapping insiders on both sides of the deal have a significantly higher incidence of financing with stock than those with non-overlapping insiders. However, the positive effect of overlapping insiders on the propensity of acquisition financing with stock becomes weaker when acquiring and target firms are in the same industry. These results suggest that the effect of a particular channel of information asymmetry reduction on the payment method is greatest in the absence of other channels. Our results are robust to several checks.

The role of the dual holder in mitigating underinvestment

AbstractThe literature on dual holding focuses exclusively on cases where the holder is primarily a creditor and buys the firm's stocks to reduce potential wealth transfer. However, wealth transfer is not a concern when the dual holder is a stockholder first and becomes a bondholder later. We hypothesize that the principal motive behind such dual holdings is to provide debt funding to an otherwise successful firm that cannot fund good projects because of internal capital allocation problems coupled with external capital constraints. We select samples from multinational corporations based on evidence that these firms are exposed to domestic underinvestment because they are reluctant to bring back foreign profits to avoid repatriation taxes. We choose hedge funds (HFs) as dual holders. The treatment group comprises firms where HFs are dual owners, and the control group comprises firms in which HFs own stocks only. The treatment group experiences steeper financial constraints, leading to deeper underinvestment problems and causing target firms to seek HF funding. The funding corresponds well to the amount of underinvestment. Targets improve investment efficiency by alleviating underinvestment, surpassing their predual performance and the control group's postdual performance.

Understanding Large-Scale Network Effects in Detecting Review Spammers

Opinion spam detection is a challenge for online review systems and social forum operators. Opinion spamming costs businesses and people money since it deceives customers as well as automated opinion mining and sentiment analysis systems by bestowing undeserved positive opinions on target firms and/or bestowing fake negative opinions on others. One popular detection approach is to model a review system as a network of users, products, and reviews, for example using review graph models. In this article, we study the effects of network scale on network-based review spammer detection models, specifically on the trust model and the SpammerRank model. We then evaluate both network models using two large publicly available review datasets, namely: the Amazon dataset (containing 6 million reviews by more than 2 million reviewers) and the UCSD dataset (containing over 82 million reviews by 21 million reviewers). It has been observed thatSpammerRank model provides a better scaling time for applications requiring reviewer indicators and in case of trust model distributions are flattening out indicating variance of reviews with respect to spamming. Detailed observations on the scaling effects of these models are reported in the result section.

Antecedents to Firm Performance and the Moderating Role of Environment Turbulence

Innovation is necessary for all industries’ growth and sustainability, including the pharmaceutical sector. The study has focused on the pharmaceutical sector of Karachi to examine the impact of product, process, marketing, and organizational innovations on firm performance. It also examined the moderating role of environmental turbulence. The study collected a sample of 423 employees from the target firms. We found: “product innovation, process innovation, marketing innovation, and organizational innovation positively affect firm performance.” We also found that (i) environmental turbulence moderates product innovation and firm performance, and (ii) environmental turbulence insignificantly moderates process innovation and firm performance. Past studies exhibit that innovation impacts business performance differently due to intensive competitive markets and environmental influence. Thus, to achieve high business performance, firms must focus on all the dimensions of innovation (i.e., product, process, marketing, and organization). Environmental turbulence, directly and indirectly, affects firm performance. Therefore, firms must deal with it adequately. Keywords: Environmental turbulence, product innovation,

Technological Diversity in M&A Network and High-Quality Development of Enterprises

ABSTRACT This study breaks through the homogeneity of mergers and acquisitions (M&A) and the dyadic relationship between the acquirer and the target firm. We consider the network content of technological diversity that reflects both acquirers–target firms and target firms–target firms. The study empirically explores the impact and mechanism of technological diversity in M&A network on the high-quality development of enterprises (HQDE). Our study reveals that technological diversity in M&A network has an inverted U-shaped effect on HQDE. Mechanism analysis shows that the technological diversity in M&A network affects HQDE through both the quantity and quality of technological innovation. The findings provide novel insights to enable acquirers to select appropriate target firms and overcome technological innovation dilemmas, thus advancing toward high-quality development.

Geographic distance in cross-border acquisitions: The impact of CEO's psychological attributes

This study examines the influence of acquiring firm CEOs' psychological attributes on the geographic distance of target firms in cross-border acquisitions. Drawing on the regulatory focus theory, we argue that CEOs with a higher dispositional prevention focus are more vigilant and loss-aversive, avoiding target firms at a greater geographic distance in cross-border acquisitions. Furthermore, building on the concept of regulatory misfit, we examine the moderating effect of acquiring firm CEOs' context-specific experience and the munificence of acquiring firms' industries in priming the dispositional prevention focus. In a sample of 218 cross-border acquisitions by public firms from the United Kingdom from 2006 to 2014, we find support for our hypotheses. This study emphasizes the role of micro-foundations in cross-border acquisitions and deepens the understanding of cross-border acquisition location choice decisions.

The effects of cross‐border acquisitions on firms' productivity in the EU

AbstractThis study empirically investigates the extent to which firms in the European Union, once acquired through a cross‐border acquisition, show different productivity levels as compared to those firms that have not been acquired. Our identification strategy relies on the combination of Propensity Scores and the Staggered Difference‐in‐Difference estimator, using firms' balance sheet data for the years 2008–2018. We find that cross‐border acquisitions decrease the productivity of the acquired firms, especially in the manufacturing sector, both high‐ and low‐tech. We also find evidence of origin and sector heterogeneity. Firms targeted by acquirers with ultimate owners originating in emerging market economies and Offshore Financial Centres also decrease productivity of target firms operating in high‐tech manufacturing sectors.

Does Technological Intensity Matter for Global Cross‐Border Mergers and Acquisitions in Manufacturing, 1998–2018?

AbstractDespite being a key feature of the globalising world since the 1980s, the patterns and relationships between acquirer and target firms in cross‐border mergers and acquisitions (M&As) have only gained attention in recent years. By examining the data between 1998 and 2018 through multinomial logistic regression models, this paper investigates the goodness of match on technological intensity (the closeness of technological capabilities) between acquirer and target firms and the effects of geographical, cultural and institutional proximity in global cross‐border M&As in manufacturing sectors. Our results suggest that firms are more likely to acquire overseas counterparts with similar levels of technological intensity in manufacturing. Moreover, geographical proximity is significant in the M&As of target firms in low‐tech and medium‐low‐tech sectors, while cultural and institutional proximity matter for cross‐border M&As among medium‐high‐tech and high‐tech firms. High‐tech acquirer firms in advanced economies tend to acquire their high‐tech counterparts located in larger economies, while technological intensity is more important for high‐tech acquirer firms based in non‐advanced economies, as the closeness of technological knowledge with potential target firms allows them to generate potential synergies and overcome cultural gaps and foreignness in distant host countries.

Proximity and cross-border acquisitions of technology assets by firms in latecomer economies: a study of Chinese firms, 2001-2018

ABSTRACT We propose an analytical framework to examine how various dimensions of proximity between home and host countries could account for the trajectories and specificities of cross-border acquisitions of technology assets (CATAs) conducted by acquirer firms in latecomer economies. As Chinese firms have been increasingly using CATAs as a mean to catch up with their counterparts in advanced economies, we referred to their acquisition records to illustrate the applicability of the proposed framework. Based on a compiled dataset of the number of CATA transactions from 2001 to 2018, this paper examines the effects of various dimensions of proximity on the spatio-temporal patterns of Chinese CATAs using negative binomial regression models. Our findings demonstrate that the difference in governance between China and host countries (institutional proximity), the size of overseas Chinese population in host countries (social proximity), and the value of import from host countries (economic proximity) have significant effects on the propensity of Chinese firms to engage in CATAs. Physical distance and cultural gap between China and host countries, however, have no significant impact on CATAs. Further examination of the results reveals that Chinese firms tend to acquire target firms outright in culturally distant host countries to reduce the risk of their overseas acquisition in CATAs. In addition, we also found that there is a dynamic relationship between different dimensions of proximity and CATAs: from the relative importance of economic proximity between 2001 and 2012 to the rising influence of social and institutional proximity between 2013 and 2018 on CATAs.

The takeover Tango: Unraveling the impact of state-owned enterprise acquisitions on American competitors

When foreign state-owned enterprises (SOE) enter the United States (US) market by acquiring domestic targets, they increase competition in the targeted industry and pressure domestic competitors. Competitors should respond to such acquisitions by changing their behavior. Using acquisition data from 2010 to 2018, we examine the impact of acquisitions by foreign SOEs on the US competitors of acquisition targets. We analyze the initial response to acquisition announcements, the attempts of industry incumbents to increase their political connections, and the change in profitability and efficiency of such incumbents. Investors respond most negatively to SOE acquisitions when the domestic competitor is politically connected, implying such firms have the most to lose from such acquisitions. The US target firms can access resources from SOEs to offer better and cheaper products and thus increase their market share. Our analysis shows that competitors’ profitability and lobbying activity decrease while efficiency increases after SOE acquisitions. These results indicate that SOE acquisitions force domestic competitors to adapt to a changing competitive environment.

Sovereign Wealth Funds and Corporate Investments: Evidence from Norway Sovereign Wealth Fund target firms

Using a sample of 105 Indian firms acquired by the Norwegian Sovereign Wealth Funds, we investigate whether Sovereign Wealth Fund investments affect the corporate investments of firms., particularly, whether Norway sovereign wealth fund serves as a disciplinary mechanism in reducing the mangers opportunistic behavior. Our findings reveal that Norway Sovereign Wealth Fund ownership and size reduce corporate investments, supporting the political agenda hypothesis, suggesting that the firm must decide on taking large ownership stakes of Norway Sovereign wealth funds ownership to attenuate mangers opportunism behavior and political agendas. Our findings are robust to an alternative measure of sovereign wealth funds and endogeneity concerns.

The impact of hedge fund activism on audit pricing

The extant literature focuses on the economic effect of significant changes that activist hedge funds enact, but shows mixed findings about the effect on the information environment. We investigate the informational effect on the third party — namely, the auditor — and argue that the potential significant changes in target firms heighten the complexity and uncertainty of the information environment, potentially increasing the workload or risk for auditors. We find that auditors react to hedge fund intervention by increasing audit fees. This relationship holds in a battery of identification tests that address endogeneity, including difference-in-differences analysis with propensity score matching, coarsened exact matching, entropy balancing, and a placebo test. Further analysis supports our conjecture that information complexity and uncertainty increase in target firms, leading to higher audit fees. Moreover, auditors increase their effort after intervention but do not seem to incur greater audit risk. This finding suggests that the information risk arising from the potential post-intervention changes is within auditors’ threshold of risk tolerance, consistent with the corporate governance effect of hedge fund activism.

Cross‐border acquisitions by sovereign wealth funds: A legitimacy‐based view

AbstractResearch SummaryDrawing on institutional economics and the legitimacy‐based view of political risk, we investigate the factors determining the realization of cross‐border investments by sovereign wealth funds (SWFs), whose investments often suffer from a lack of legitimacy in host countries. Using matching models on all the realized and potential investments, we find that investments are more likely to materialize when the SWF home country and the host country enjoy cordial political relations or are involved in a trade agreement. Contrary to the theoretical predictions, SWF politicization does not per se represent an impediment to the realization of investments. Rather, it has a negative effect on the likelihood of an investment's realization only in the presence of trade agreements.Managerial SummaryA recent trend in the global economy is the increasing cross‐border investment activity undertaken by sovereign wealth funds (SWFs), large investment vehicles where financial and political goals often co‐exist. On the grounds of possible financial or political destabilization, SWFs' cross‐border investments attract scrutiny and suspicion in host countries, hindering their realization. We analyze SWF‐ and country‐level factors that may determine the successful realization of SWFs' cross‐border acquisitions. We suggest that managers ex ante select target firms and host countries by considering their fund's governance and degree of independence from home‐country politics in interaction with bilateral (home‐host country) political and economic relations, so as to secure legitimacy for their investments and maximize the chances that cross‐border investment strategies may materialize.

Homophily and Merger Dynamics

AbstractWe propose a novel multi‐factor metric of homophily between the CEOs of the acquirer and target firms as a causal determinant of mergers and acquisitions (M&As). We find strong evidence that higher homophily among the two CEOs increases the likelihood of M&A deal initiation and completion. When homophily is high, deals are more likely to be paid in cash, exhibit significantly larger long‐term value creation and are less subject to ex‐ante overpricing as measured by ex‐post goodwill write‐offs. These effects stem from similarity between CEOs creating trust, reducing information asymmetry and facilitating effective communication. Our approach resolves prior conflicting results on the effect of homophily on large corporate decisions and strongly indicates the need for a multi‐dimensional estimation of homophily to obtain conclusive results.

Smoke signal: When firms' patent strategy and local patent protection system affect equity stakes in cross-border acquisitions

A distinctive feature of many international acquisitions of firms with technology resources is the extreme uncertainty about the value of the target's resources. Such uncertainty increases the complexity of ownership decisions in target firms. Drawing from signaling theory, we articulate how international acquirers perceive the pre-emptive power of target firms' patent portfolio as a positive signal, increasing their confidence in target firms' technology and leading them to seek a higher level of equity. We further argue that the strength of the target firm's home country's patent system also acts as a positive signal that encourages investors to acquire a higher level of equity in cross-border acquisitions. However, it also weakens then impact of the pre-emptive power signal. Our findings have implications for scholars, policymakers, and managers.

Acquisitions and Technology Value Revision

Acquisition announcements coincide with upward value revisions for the target firms’ technology peers, which are not due to economic relations based on product market, supply chain, or geographical location. Such a phenomenon is robust across subsample periods, not specific to merger or technology waves, and not related to product-market structure and the unique innovation features of certain technology-intensive industries. Firms experience more dramatic value revisions when they have deeper technology overlaps with their targets, are more dependent on technology, or when a transaction features higher premium or greater technology overlap between the acquirer and target. Our mechanism analysis provides evidence that is primarily consistent with the acquisition-probability hypothesis whereby acquisition announcements elevate expected technology synergies and merger prospects for peers and partially in line with the enhanced-investment hypothesis that peers’ revaluations correlate with increased technology investments. We do not find any evidence in line with the competition-balance hypothesis that attributes peers’ value revisions to the change in industrial competition intensity. Overall, our results demonstrate that acquisition announcements disseminate novel information about the value of technology that is of common interest among firms with close technologies. This paper was accepted by Gustavo Manso, finance. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4890 .

The disciplinary role of unsuccessful takeovers and changes in corporate governance

AbstractThis study examines if unsuccessful takeovers trigger the replacement of directors and changes in other governance attributes and result in improvements in target firm performance. Using an Australian sample this study finds that following failed bids, target firms are more likely to remove directors and experience an increase in director ownership, board independence, and block ownership. In contrast, target firm director expertise and prestige decrease following failed bids. We also find that post‐bid accounting and stock performance of targets are largely unrelated to changes in governance attributes after the unsuccessful takeover.

How Does Takeover Competition Affect the Stock Performance of Targets and Acquirers? Evidence from the European Union

Abstract We examine the impact of M&A announcements on stock prices of targets and acquirers in the European Union from 2002 to 2021. In line with the literature, we find strong positive returns for the target firms’ stocks, whereas returns are low or insignificant for the acquirers. We contribute to the literature by focusing on the effect of takeover competition and distinguishing between the returns of first and later bids. Accordingly, we confirm strong relationships between subsequent offers and target firms’ stock returns. These returns increase if a second order is made and if the premium related to the second offer is higher.

Deal completion in cross border acquisitions waves: The role of deal timing and pace

AbstractResearch SummaryCross‐border acquisitions (CBAs) exhibit a wave‐like pattern, clustering temporally, industry‐wise, and at the country level. We draw upon the bargaining power perspective and argue that CBA wave context alters the relative bargaining position between acquirer and target firms, which affects deal completion. Our findings suggest that acquisition wave deals have a lower likelihood of completion compared to non‐wave deals. However, within a CBA wave, we find that acquirers that move early and with a high acquisition pace have a higher likelihood of deal completion. We test our arguments on a simulation‐based dataset comprising 17,815 wave and non‐wave deals identified between 1990 and 2012 across 13 acquirer and 21 target countries. We contribute to the CBA literature by differentiating between wave and non‐wave environments and their impact on deal completion.Managerial SummaryCross‐border acquisitions (CBAs) often happen in waves that emerge at the industry and country‐levels. These waves are characterized by heightened level of acquisition activities such that the relative position of acquirer and target firms is different within waves as compared to outside of the waves. As a result, acquisition deals announced within waves are less likely to be completed than those announced outside of the waves. At the same time, acquiring firms that announce acquisitions at an early stage within a CBA wave and move with a faster speed to conduct more acquisitions are more likely to successfully close the deals than other firms.