1 s2.0 S014481881100024X Main

International Review of Law and Economics 31 (2011) 169187
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International Review of Law and Economics
Cross-border Mergers and Acquisitions in different legal environments

Isabel Feito-Ruiz , Susana Menndez-Requejo
Department of Finance, University of Oviedo, Avda. del Cristo s/n, 33071 Oviedo, Spain
a r t i c l e
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a b s t r a c t
The aim of this paper is to analyze the inuence of the legal and institutional environment on bidder rm returns around the announcement date of cross-border Mergers and Acquisitions (M&As). The database includes 469 M&As of European (221 cross-border and 248 domestic) listed rms, with target rms being worldwide public or private rms (40 countries), over the 20022006 period. Shareholders of acquiring rms place greater value on cross-border M&A announcements than on domestic ones. The stronger (weaker) the legal and institutional environment of the acquirer rm country in comparison with that of the target rm country, the more positive (negative) the effect on acquiringrm shareholders valuation of M&As. 2011 Elsevier Inc. All rights reserved.
Article history: Received 22 July 2009 Received in revised form 7 April 2011 Accepted 4 May 2011 JEL classication: G30 G32 G34 F30 Keywords: Mergers and Acquisitions (M&As) Cross-border deals Acquiring-rm abnormal return Legal environment Investor protection
1. Introduction The aim of this study is to analyze shareholders valuation of M&A announcements, examining the differences between acquiring-rm shareholder valuation in cross-border and domestic M&As, and considering the inuence of the different legal and institutional environments on cross-border M&As. Empirical research shows contradictory results. Some studies nd that acquiring-rm shareholder valuation for cross-border M&As is, on average, positive (Francis, Hassan, & Sun, 2008; Martynova & Renneboog, 2008). However, others nd a negative acquiring-rm shareholder valuation (Bris & Cabolis, 2008; Hagendorff, Collins, & Keasey, 2007; Kuipers, Miller, & Patel, 2009; Moeller & Schlingemann, 2005). The studies also differ as to how the legal and institutional environment may inuence acquiring-rm shareholder valuation, after controlling for acquiring and target rm characteristics. Starks and Wei (2004) establish two contrasting hypotheses in relation to acquiring-rm shareholder valuation of cross-border acquisitions of listed or unlisted US target rms in 19801998. They propose that foreign acquiring rms belonging to countries with a weak legal and institutional environment may pay a higher price
Corresponding author. E-mail addresses: feitoisabel@uniovi.es, feitoisabel@gmail.com (I. Feito-Ruiz), srequejo@uniovi.es (S. Menndez-Requejo). 0144-8188/$ see front matter 2011 Elsevier Inc. All rights reserved. doi:10.1016/j.irle.2011.05.002
to acquire rms in the US, in order to compensate for the greater risk incurred with such target rms. They also consider whether foreign acquiring rms may obtain gains from the changes induced in their corporate governance systems from adopting the better corporate governance system of the US target rm. They nd that acquiring rms pay a higher price for target rms if they come from countries with a weaker legal and institutional environment than that of the US. Thus, foreign acquiring rms gain less in such deals. Along the same lines, Kuipers et al. (2009) analyze cross-border M&As in the period 19821991, with the target rms being listed US rms. Their results show that a stronger legal and institutional environment in the acquiring rm reduces the price of the deal and increases acquiring-rm shareholders gains. Moeller and Schlingemann (2005) analyze the US acquiring-rm shareholder valuation when acquiring worldwide target rms, in 19851995. They propose that more asymmetric information and agency problems in target countries with a weak legal and institutional environment may increase the premium paid, since target rms have more concentrated ownership structures in these countries. Nevertheless, a weak legal and institutional environment may be a source of gains for acquiring rms, if target rms accept a lower premium in order to compensate for asymmetric information and agency problems. The authors do not nd evidence about the inuence of the target countrys legal and institutional environment on acquiring-rm shareholder returns. However, Francis et al. (2008) show that US acquiring rms acquiring worldwide rms in the period 19902003 beneted from acquisitions in countries with
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I. Feito-Ruiz, S. Menndez-Requejo / International Review of Law and Economics 31 (2011) 169187
a weak legal and institutional environment. Acquiring rms provide target rms with access to cheaper nancial funds, through the internal capital market generated by acquiring rms. This benet is higher for acquiring rms with a lower cost of capital. They conclude that cross-border M&As may be considered a mechanism to avoid market inefciencies by providing funds to target rms. Francis et al. (2008) justify the difference in their results from those of Moeller and Schlingemann (2005) because of the lower transaction cost of cross-border M&As and the more developed global nancial markets after the 1990s. They analyze different periods of time. Hagendorff et al. (2007) analyze the acquiring-rm shareholder return of nancial rms during 19962004. Acquiring and target rms are listed in the US or Europe. They consider domestic and cross-border M&As as a whole. Their ndings show that a weak legal and institutional environment in the target country positively inuences acquiring-rm shareholder valuation, given that acquiring rms pay a lower price to the target rm to compensate for the higher agency and information asymmetry costs in these countries. For worldwide M&As among listed rms in the period 19892002, Bris and Cabolis (2008) observe that acquiring rms pay a higher premium for target rms from countries with a weaker legal and institutional environment than for domestic M&As. The authors associate this higher price with the more concentrated ownership structures that public target rms have in countries with a weaker legal environment, leading them to demand higher prices for their shares. This study focuses on the differences between acquiring and target legal and institutional environments. Martynova and Renneboog (2008) analyze European M&As announced by listed acquiring rms, with target rms both listed in a European stock market and unlisted, during the fth M&A wave (19932001).1 They nd that acquiring rms obtain more positive abnormal returns in cross-border deals when target rms come from both weaker and stronger legal and institutional environments than the acquiring rms. They associate the positive effect of the weaker legal and institutional environment in the target country with the law spillover effect2 of improvements in corporate governance in the target rms. The positive effect of the stronger target corporate governance system is related to the bootstrapping effect, given that acquiring rms may adopt voluntarily the better corporate governance system of the target rms in partial acquisitions. They reject a negative law spillover effect when the target rms come from countries with a stronger legal and institutional environment. These studies show differences in the samples used. Some of them consider only American target rms (Kuipers et al., 2009; Starks & Wei, 2004), only American acquiring rms (Francis et al., 2008; Moeller & Schlingemann, 2005), only nancial listed rms (Hagendorff et al., 2007), only listed target rms (Bris & Cabolis, 2008), or only European acquiring and target rms (Martynova & Renneboog, 2008). There are also differences in the periods analyzed. The main motivation of this paper is to analyze how European acquiring-rm shareholders value the announcement of a cross-
border M&A when the target rm is listed or unlisted in any country around the world in the period 20022006. An analysis of European M&As cannot be complete without considering the frequent acquisition of rms in Latin America, or in emerging markets such as China. Considering target rms in countries outside Europe also allows us to cover a broader range of legal and institutional environments, and thus to better analyze their possible inuence. Unlike previous studies, we focus on a more recent period, which includes the sixth M&A wave (as from 2003). After the 2002 Sarbanes-Oxley Act (SOX) in the US, the rules for quotation on stock markets became stricter for rms, above all for foreign rms from countries with weak legal and institutional environments. This stricter regulation has been also established in Europe. It may have increased the cost of the access to the market for foreign rms in countries with strong legal and institutional environments. In addition, in stronger legal and institutional environments, corporate control markets are more active and competitive. Therefore, we can expect acquiring-rm shareholders to value deals negatively when the target rm belongs to a country with a stronger legal and institutional environment, because of the higher transaction cost. This acquiring-rm shareholder valuation will be more negative if the target rm is listed than if it is private, given that the acquisition of listed rms will generate more competition and this competition will be greater in countries with a strong legal and institutional environment. Conversely, when the acquiring rm belongs to a country with a stronger legal and institutional environment, less economic freedom and less law enforcement in the target country might hinder acquisition negotiations and increase the risk of operating in this country. This may reduce the gains of the acquiring rms. We therefore propose two contrasting hypotheses about how the differences between the legal and institutional environment of acquiring and target rms inuence acquiring-rm shareholder valuation when European acquiring rms acquire worldwide listed or unlisted target rms in a more recent period than previous studies (20022006). Our main ndings show that the acquiring-rm shareholders return is more positive in cross-border deals than in domestic ones. The stronger the legal and institutional environment of the acquiring rms, the more positive the effect on acquiring-rm shareholders valuation of M&As, and vice versa. The legal and institutional environment is a determinant in acquiring-rm shareholders valuation when there are relevant differences between the acquiring and target rm countries. A stronger legal and institutional environment in the target country increases the transaction cost for cross-border deals, so the decision to acquire a rm in these countries is negatively valued by acquiring-rm shareholders. After this introduction, we structure the paper as follows. In the second section, we review the nancial literature on shareholder valuation of M&As in cross-border transactions and the inuence of the legal and institutional environment, proposing the hypotheses to be studied. In the third section, we present the database and descriptive statistics. In the fourth section, we estimate the abnormal returns and analyze how they differ according to the legal and institutional environment. In the fth section, we carry out a multivariant analysis of abnormal return determinants. And, in the sixth and nal section, we present the conclusions.
1 The fth M&A wave is considered to have begun in 1993 and to have collapsed in 2000, as a result of the stock market downturn that year. The main drivers of this M&A wave were globalization, technological innovation, the bull nancial market, deregulation and privatization (Goergen, Martynova, & Renneboog, 2005). 2 According to international law, a full acquisition leads to a change in the nationality of the target rm so acquiring-rm corporate governance regulation will be applied to both companies. Martynova and Renneboog (2008) named this the positive spillover law effect when the acquiring rm has better corporate governance regulation than the target one, and the negative spillover law effect otherwise. When the acquiring rm voluntarily adopts the better corporate governance system of the target rm, the authors name this positive effect bootstrapping.
2. Research background: acquiring-rm shareholders valuation of M&As Empirical studies on acquiring-rm shareholders valuation of M&As around the date of M&A announcements show contradictory results. While research studies agree on the positive valuation by acquired-rm shareholders of M&A announcements, the same does
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not occur with the valuation by acquiring-rm shareholders. Some studies conclude that acquiring-rm shareholders negatively value the announcement of an M&A,3 while others obtain positive abnormal returns.4 To reect upon the reasons for these differences, it is necessary to examine the differences in the databases analyzed, as well as to study the relevance of the characteristics of both the rms involved and the transactions, since such characteristics might increase or mitigate asymmetric information and agency problems for rms. More information asymmetry and agency costs might have a negative inuence on the acquiring-rm shareholders valuation. Among the former studies, concerning rms listed in the USA, Travlos (1987) obtains a cumulative abnormal return for the acquiring rm of 1.6% when payment is made in shares of stock and of 0.13% when in cash. For the USA, Chang (1998) reports a cumulative abnormal return of 0.09% when unlisted rms are acquired and payment is in cash and 0.02% when the target rms are listed. When the transaction payment is in equity, the abnormal return takes the value of 2.64% if the target rm is unlisted, and 2.46% if listed. The increase in merger and acquisition operations in the European market since the 1990s allows for comparison of results with those of the American market. Several papers focus on acquisitions carried out by European nancial rms, such as Cybo-Ottone and Murgia (2000), who report positive abnormal returns of 0.99% for acquiring-rm shareholders, although some obtain negative cumulative returns: Beitel et al. (2004), 0.01% for operations in any part of the world; Campa and Hernando (2006), 0.87% for European transactions; and Hagendorff et al. (2007), 0.32% for European and American nancial rms. In the USA, studies with databases starting from the 1980s or 1990s again obtain diverse results: Mulherin and Boone (2000), 0.37%; Walker (2000), 0.30% for non-nancial rms; and De Long (2001), 1.68%, while Moeller, Schlingemann, and Stulz (2004) obtain abnormal returns of 1.10% and Fuller, Netter, and Stegemoller (2002), 1.77% for non-nancial rms. 2.1. Acquiring-rm shareholder valuation determinants: transaction and rm characteristics After reviewing the research to date, we highlight the following characteristics of transactions and rms involved in M&As as determinants for acquiring-rm shareholder valuation. These characteristics may increase or mitigate the asymmetric information or agency costs for rms so may affect acquiring-rm shareholders valuation:
(b)
(c)
(d) (a) Cross-border vs. domestic transactions. Earlier studies found mixed results regarding the effect of cross-border M&As on acquiring-rm returns, and a positive effect in domestic M&As. The internationalization theory predicts a positive return from cross-border acquisitions, associated with gains from geographic diversication when rms seek synergies from their intangible assets (Baldwin & Caves, 1991; Morck & Yeung, 2003). However, other studies consider a negative effect on returns in cross-border acquisitions, due to more asymmetric information problems when evaluating foreign targets. Doukas and Travlos (1988), Doukas (1995) and La Porta, Lpez-deSilanes, Shleifer, and Vishny (2000) show that cross-border
3 Travlos (1987), Walker (2000), De Long (2001), Gregory and McCorriston (2002), Goergen and Renneboog (2004), Campa and Hernando (2006) and Hagendorff et al. (2007). 4 Maquieria et al. (1998), Fuller et al. (2002), Campa and Hernando (2004), Moeller et al. (2004), Ben-Amar and Andr (2006) and Faccio et al. (2006).
(e)
M&As create value. Others (Denis, Denis, & Yost, 2002; Moeller & Schlingemann, 2005) show that cross-border transactions destroy value. Studies for periods following the 1990s show a positive acquiring-rm shareholder valuation for cross-border M&A announcements, both in the United States (Francis et al., 2008) and in Europe (Antoniou, Petmezas, & Zhao, 2007; Conn, Cosh, Guest, & Hughes, 2005; Martynova & Renneboog, 2008). After this period the transaction cost of cross-border deals decreased owing to the reduction of foreign investment barriers, although these studies show that domestic operations generated greater returns. In contrast, Bris and Cabolis (2008) show a negative acquiring-rm shareholder valuation for crossborder M&As around the world when the target rm is listed. This effect is associated with the legal and institutional environment of the rms country (see Section 2.2). Method of payment and nancing. Managers will prefer to pay for an M&A with equity if they consider that their rms shares are overvalued. Thus, the announcement of an acquisition paid in equity will be a negative signal to the acquiringrms shareholders and will therefore be valued negatively (Myers & Majluf, 1984). Conversely, acquiring shareholders will positively value payment in cash (Goergen & Renneboog, 2004; Martynova & Renneboog, 2006; Moeller et al., 2004; Sudarsanam & Mahate, 2003; Travlos, 1987). Faccio and Masulis (2005) consider that acquiring rms face a trade-off between losing corporate control and nancial constraints when they decide on the M&A payment method. They nd that Continental European acquiring rms with concentrated ownership structure are more likely to pay for M&As with cash in order to maintain the control of the rm and avoid losing the private benets of control. For UK acquiring rms, this relationship is cubic. Also relevant is the method of nancing (Martynova & Renneboog, 2011). In fact, cash payment may be nanced with debt, equity or internal funds. In particular, Martynova and Renneboog (2011) nd that valuation of an M&A paid only with cash, but nanced with equity, is similar to the valuation of M&As paid only with equity. Friendly vs. hostile takeover. Hostile takeovers raise the price paid for the target rm, which determines a negative acquiringrm shareholders valuation (Campa & Hernando, 2004; Goergen & Renneboog, 2004; Gregory, 1997; Martynova & Renneboog, 2006; Schwert, 1996, 2000; Servaes, 1991). However, the expectation of improvement of efciency in the target rm after a hostile M&A could be positively valued for both, acquiring and target rms shareholders. There is not empirical evidence of this effect of hostile takeovers. Focus vs. diversication. Empirical studies obtain mixed results regarding M&A valuation which implies the diversication of business focus. Buying a rm from the same industry or from outside it will depend on the rms strategy. If the rm is searching for operative synergies, it will acquire a rm from the same industry. However, if the bidder rm prefers to obtain nancial synergies, it will buy a rm from an industry not related to its main activity. Jensen and Ruback (1983), Bradley, Deai, and Kim (1988), Campa and Kedia (2002), and Raj and Forysth (2002) associate wealth creation with diversication in M&As; while Mock, Shleifer, and Vishny (1990), Lang and Stulz (1994), Berger and Ofek (1995), and Maquieria, Megginson, and Nail (1998) conclude that diversication diminishes acquiring-rm shareholder wealth owing to bidder managers overestimation of future performance, which leads them to overprice the transaction. Managerial opportunism and growth opportunities. Firms with free cash-ow are more likely to carry out acquisitions no matter what the circumstances are (Harford, 1999; Jensen, 1986), so their shareholders are likely to negatively value an
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M&A announcement. Lang, Stulz, and Walking (1989) show that rms with a high market-to-book ratio obtain high abnormal returns around the acquisition announcement, while Dong, Hirshleifer, Richardson, and Teoh (2006) nd the contrary, which leads them to consider the ratio as a proxy for overvaluation. (f) Size of acquiring rm. The greater the separation between ownership and control, which tends to be the case in large rms, the greater managerial interest in M&As is likely to be, even if the price is excessive (managerial hubris hypothesis, Roll, 1986), resulting in a worse valuation on the part of the acquiring-rms shareholders (Beitel, Schiereck, & Wahrenburg, 2004; Faccio, McConnell, & Stolin, 2006; Moeller et al., 2004; Schwert, 2000). (g) Relative size of the target rm. The larger the target rm, the more information there will be on it, as well as fewer adverse selection problems when valuing it (Asquith, Bruner, & Mullins, 1983; Conn et al., 2005; Fuller et al., 2002). However, this will generate higher integration costs between the two rms (Agrawal, Jaffe, & Mandelker, 1992; Beitel et al., 2004), which acquiring-rm shareholders will value negatively. (h) Target rm listing. The majority of studies analyze acquisitions of listed rms. Acquiring a listed rm generates the free-rider problem (Grossman & Hart, 1980), which raises the payment price. Acquiring unlisted rms does not generate as much competition. Furthermore, given that it is more difcult to sell private rms than public ones, there may well be a liquidity discount in the price for acquiring a private rm (Ofcer, 2007). That is to say, adverse selection forces prices to drop (Akerlof, 1970). Chang (1998), Fuller et al. (2002), Moeller et al. (2004), and Conn et al. (2005) show greater gains in purchases of private companies. Faccio et al. (2006) claim that the positive abnormal returns when an unlisted target rm is acquired are associated with the actual effect of listing. They obtain positive abnormal returns of 1.48% when the target rm is unlisted, and negative returns of 0.38% when it is listed. Furthermore, the classic negative effect of equity payment may turn to positive when the bidder buys a private target (Fuller et al., 2002). A private target probably has more concentrated ownership, with some managers being shareholders. In this case, if the deal is paid with equity, the target managers will become shareholders of the new rm, having incentives to monitor the acquirer managers. Then, the acquisition of unlisted rms may reduce agency conicts and asymmetric information between managers and shareholders, when the M&A is paid with equity. Current acquiring-rm shareholders will positively value this increase in monitoring (Bradley & Sundaram, 2004; Chang, 1998; Fuller et al., 2002). Therefore, these studies suggest that the listing effect may actually be a payment method effect. However, Faccio et al. (2006) claim that the payment method effect on the European acquiring-rm shareholder valuation is negative with listed target rms and positive with unlisted ones (as in the US), but the payment method effect is different from the listing effect. Ofcer, Poulsen, and Stegemoller (2009) nd that the acquiring-rm shareholder valuation is higher when the acquirer uses equity to acquire unlisted rms that are more difcult to value than listed rms. Equity as the payment method can reduce the risk of the deal, since the target owners are also sharing the risk with the acquirers (Hansen, 1987). 2.2. Inuence of the legal and institutional environment on cross-border M&A valuation Since La Porta, Lpez-de-Silanes, Shleifer, and Vishny (1998), many studies have analyzed the relationship between the institutional and legal environment in which rms operate and their corporate nance practices and rm valuation. A strong legal
and institutional environment in a country may be associated with: high investor (shareholder and creditor) protection, which increases the cost of expropriation of minority shareholders wealth by insiders (managers and large shareholders) (Bris & Cabolis, 2008; Conn et al., 2005; Dyck & Zingales, 2004; Kuipers et al., 2009; La Porta et al., 2000; Martynova & Renneboog, 2008, in press; Nenova, 2003; Starks & Wei, 2004); more economic freedom, which improves business activity and foreign investment; more capital market development, which reduces the cost of external nancing (Francis et al., 2008; Moeller & Schlingemann, 2005; Pablo, 2009); and, more activity and competition among the corporate control markets, which improves the efciency of corporate governance in rms (Hagendorff et al., 2007; Rossi & Volpin, 2004). Therefore, countries with a strong legal and institutional environment will have strong corporate governance systems and developed capital markets. In relation to the link between Law and Finance and M&A literature, Rossi and Volpin (2004) focus on the inuence of the legal environment on cross-border takeovers. They nd that countries with greater shareholder protection have more M&A activity and that, in cross-border M&As, target rms are in countries that afford less shareholder protection than those of the bidders. Being acquired by a rm with stronger shareholder protection may improve the efciency of target rms having weak legal and institutional environments and reduce their cost of capital, but the benets are not so clear for acquiring rms. The characteristics of the legal and institutional environments in the acquiring and target countries might explain the different effects on acquiring-rm shareholders valuation in cross-border M&As. A weaker legal and institutional environment in the target country may be a source of gains for acquiring rms, given that this provides target rms with access to cheaper nancial funds, through the internal capital market generated by acquiring rms (Francis et al., 2008), and allows a better corporate governance system to be imposed on the target rm, generating value for both rms and reducing the private managerial benets of control (Hagendorff et al., 2007; Martynova & Renneboog, 2008). Nevertheless, public target rms in countries with a weaker legal and institutional environment have more concentrated ownership structures, so are likely to demand higher prices for their shares, reducing the gains of the deal for acquiring rms (Bris & Cabolis, 2008). A stronger legal and institutional environment in the target country may reduce the gains for acquiring rms, if they have to pay a higher price for the target rm in order to compensate it for having to adopt a worse corporate governance system (Kuipers et al., 2009; Starks & Wei, 2004). In contrast, acquiring rms may voluntarily adopt the better corporate governance regulation of the target rm. This effect may be stronger in partial acquisitions and when target rms continue to be listed in their local market (Martynova & Renneboog, 2008). This study aims to examine the acquiring-rm shareholders valuation of M&As and to what extent it depends on the legal and institutional environment of both rms in cross-border M&As. We propose two contrasting hypotheses in relation to the differences between the acquiring and target rms legal and institutional environments considering that more (less) active and competitive corporate control markets might inuence acquiring-rm shareholder valuation: (1) On the one hand, transactions involving a target rm in a country with a weak legal and institutional environment will take place in a market with less active and less competitive corporate control. In this environment, the likelihood of nding undervalued target rms increases for bidders from countries with a stronger legal and institutional environment.
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Thus, bidder wealth appropriation will be valued positively by acquiring-rm shareholders Hypothesis 1. If the target belongs to a country with a weaker (stronger) legal and institutional environment, the acquirer shareholders return will be positive (negative) at the announcement of the M&A. Furthermore, if the acquirer comes from a country with a strong legal and institutional environment and buys 100% of the shares, according to international corporate law, the target rm will adopt better corporate governance practices and will show a greater degree of transparency and shareholder protection. This improvement of efciency in the acquired rms governance system increases the wealth created by the acquisition for both rms (Bris & Cabolis, 2008; Francis et al., 2008; Kuipers et al., 2009; Martynova & Renneboog, 2008; Moeller & Schlingemann, 2005; Starks & Wei, 2004). Hypothesis 1.1. If the target belongs to a country with a weaker (stronger) legal and institutional environment and the bidder buys 100% of the shares, the acquirer shareholders return will be more positive (more negative) at the announcement of the M&A. If the target rm comes from a country with a stronger legal and institutional environment than the bidder rm, we can expect fewer opportunities to nd undervalued rms, and the target rm may suffer a reduction in its corporate governance system efciency. Moreover, the stricter rules for listed rms since the 2002 Sarbanes-Oxley Act (SOX) may increase the cost of the deal (Goergen & Renneboog, 2008). Such deals would therefore be negatively valued by acquiring shareholders. Our database distinguishes between public and private target rms so we can carry out an in-depth analysis of the inuence of the legal and institutional environment on acquirer shareholders returns. Transactions involving targets in countries with more developed capital markets will take place in markets with more active and more competitive corporate control. In these environments, the likelihood of nding undervalued target rms decreases. Competition from potential acquirers will increase the price paid in the deal. This price will be higher if the target is a public rm. Hypothesis 1.2. If the target belongs to a country with a stronger (weaker) legal and institutional environment and it is a public rm, the acquirer shareholders return will be more negative (more positive) at the announcement of the M&A. (2) On the other hand, transactions involving targets in countries with a weak legal and institutional environment may generate problems and decrease the value of the M&A. Less economic freedom and less law enforcement in the target country may distort the economic and nancial environment and reduce the efciency of governments and business. Therefore, a weak environment hinders acquisition negotiations and increases the risk of operating in these countries. In addition, target rms are more likely to have a more concentrated ownership structure in countries with a weak legal and institutional environment, so they might require higher premiums to sell their shares (Bris & Cabolis, 2008). The higher bargaining power of the target rm will reduce the expected gains for acquiring-rm shareholders. Therefore, a negative M&A valuation will be expected on the part of the acquiring shareholders (Dahlquist, Pinkowitz, Stulz, & Williamson, 2003; Moeller & Schlingemann, 2005; Rossi & Volpin, 2004). Hypothesis 2. If the target belongs to a country with a weaker (stronger) legal and institutional environment, the acquirer share-
holders return will be negative (positive) at the announcement of the M&A. 3. Database The database to test the above hypotheses is made up of listed European rms which announced an M&A during the 20022006 period, with the target rm being listed or unlisted in any country in the world, with or without prior participation by the acquiring rm or a subsidiary of another rm. Analysis of this broad sample contributes to the empirical literature, given that the period of analysis includes the sixth M&A wave, which started in 2003.5 This proposed period included the restructuring of the telecom sector after the crash and led to more incentives to enter emerging markets, such as China, Eastern Europe (recently incorporated to European Union) or Japan. Furthermore, we consider the acquisition of listed and unlisted rms around the world, including US rms after the 2002 Sarbanes-Oxley Act (SOX). We obtained our dataset from the Thomson One Banker Merger & Acquisitions Database, DataStream and Lexis Nexis. The sample meets the following criteria: (i) All M&As announced by a European listed company for the period 20022006 and completed to date; (ii) Both domestic and cross-border transactions; (iii) Target rms may be listed, private or a subsidiary of the acquiring rm, in any part of the world; (iv) The transaction involves a change in control; (v) We consider nancial and non-nancial rms together, given that there were fewer legal restrictions in cross-border deals for nancial rms in comparison with earlier periods, because of the liberalization of the nancial sector. Starting with the 1058 Mergers and Acquisitions initially identied, we eliminated those transactions in which: (i) The share price is not available in Datastream (198 operations). (ii) There are relevant discrepancies regarding the announcement dates between Thomson One Banker and Lexis-Nexis (32 operations). (iii) The acquiring rm announces more than one transaction in the event window (20,+20) (129 operations). (iv) The beta parameter of the market model is not signicant at the 95% condence level (230 operations). The nal sample of M&A announcements consists of 469 transactions involving target rms from 40 countries, with a total market value of over US$ 18,400 billion and an average of over US$ 39,308.8 million. Acquiring rms paid, on average, US$ 726,456 million for target rms. In cross-border M&As acquiring rms paid, on average, US$ 942,198 million for target rms, and in domestic M&As, US$ 534,196 million. 3.1. Sample description Table 1 shows M&A distribution according to the geographical area of both the acquiring and the target rm. 44.5% of all operations were announced by rms from the United Kingdom. Table 1 shows the number of transactions in the database and classies them in accordance with the legal system of both the acquiring and target rm countries. In line with La Porta et al.
5 Takeover activity has increased after 2003, with market recoup, subsequent to the 2000 downturn. The drivers of this new M&A wave were the increase in government privatizations, entry in emerging markets and the availability of funds because of bull markets (Gregoriou and Renneboog, 2007).
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Table 1 Geographical distribution of the mergers and acquisitions. Target country All Acquirer country French legal system German legal system Scandinavian legal system English legal system
Belgium France Greece Italy Luxembourg Netherlands Portugal Spain Austria Germany Hungary Poland Switz. Denmark Finland Norway Sweden Gibraltar Ireland Jersey United Kingdom French legal system 100 Belgium 6 3 1 Egypt France 29 1 Greece 6 Italy 18 1 Luxembourg Monaco 1 Netherlands 9 Panama 1 Portugal 3 2 Russia Fed. Serbia 1 21 Spain Ukraine 1 52 German legal system Austria 2 1 Bulgaria China 4 Czech. Rep. 1 28 1 Germany 1 Hungary Japan 1 3 Poland 11 Switz. Scandinavian legal system 72 Denmark 10 14 Finland 17 Norway Sweden 31 245 English legal system 8 Australia Bermuda 1 Canada 8 Hong Kong 1 2 India 9 Ireland Jamaica 1 1 Malaysia 2 Singapore 2 South Africa 163 1 United Kingdom 46 United States 1 Utd.Arab.Emirates Domestic Cross-border All 248 3 221 3 469 6 107 1 17 5 3 10 2 1 3 1 1 1 2 1 13 1 1 1 1 3 1 1 1 1 1 1 1 1 1 1 1 5 1 1 1 1 1 1 1 1 1 5 1 12 4 1 1 4 1 17 1 1 1 1 1 1 6 1 5 1 2 3 1 1 1 12 1 3 2 3 1 3 1 1 1 1 1 2 2 2 1 1 2 1 1 1 1 1 1 2 1 1 1 1 46 93 223 1 1 3 1 2 1
5 2 5 1
6 1 1 3 4 17 19 36 5 1 6 1 1 2 2 3 6 9 1 1 2 3 3 13 15 28 4 4 7 5 12 17 29 1 1 1 1 1 1 1 3 1 7 8 5 18 23 1 1 12 14 26 3 2 17 19 36 1 5
2 10 8 18
3 5 6 11
2 137 22 1 1 1 137 72 209
1 1
6 6 12
175
(1998), we classify countries using the following system: English (common law) and German, Scandinavian, French, and Communist (civil law). There is no transaction in a country with a Communist legal system in the sample. The majority of operations take place among countries with the same legal system. Note should be taken of the number of transactions carried out among rms belonging to the English legal system (190 transactions out of the 469 which make up the sample), that is to say, with a strong legal and institutional environment. Table 2 includes the descriptive statistics for the entire M&A dataset, distinguishing between domestic and cross-border M&As. Cross-border M&As, compared to domestic M&As, use more cash payment, less equity payment, involve more related business transactions, have greater transaction value, have less relative size in comparison to the target rm (transaction value, in millions of US dollars, divided by the acquiring rm market value four weeks prior to the operation, in millions of US dollars), have more total bidder asset value (millions of US dollars) and greater market-to-book ratio, and acquire more public rms. 4. Acquiring rm shareholder valuation We shall now examine capital market valuation in M&As, following the event study methodology. We estimate abnormal returns around the M&A announcement date. We obtain the M&A announcement dates from Thomson One Banker and Lexis Nexis. We calculate the abnormal return for each announcement (AR) in the event window (20,+20) as the difference between daily returns and expected returns according to the market model, estimated in the period (200,21) before the announcement date. Datastream provides the daily return index for each rm, adjusted by dividends and splits. This return index allows estimation of the daily return. We follow the method of Dodd and Warner (1983) and Corrado (1989) for small sample sizes in order to verify the existence of signicant daily abnormal returns (AR) and cumulative abnormal returns (CAR). Table 3 shows the Cumulative Average Abnormal Return (CAAR) for acquiring-rm shareholders around the announcement of the M&A, comparing domestic and cross-border deals. The abnormal return for bidder rm shareholders on the day of the merger or acquisition transaction announcement (t = 0) is 0.49% for the entire set of rms. This result is consistent with Chang (1998), Fuller et al. (2002), Moeller et al. (2004), Faccio et al. (2006), and Martynova and Renneboog (2006). The Cumulative Average Abnormal Return for the whole sample is 0.99%, in the interval (1,+1), and statistically signicant. Therefore, acquiring-rm shareholder valuation is positive for the entire set of public rms in Europe. There are no differences between the CAAR for acquiring-rm shareholders in domestic and cross-border deals. 4.1. Acquiring-rm shareholder valuation according to transaction characteristics We now analyze the acquiring shareholder valuation in more detail, in accordance with the aim of this paper. We compare crossborder and domestic deals, according to the transaction and rms characteristics. Table 4 shows the Cumulative Average Abnormal Return for acquirer shareholders in (1,+1), taking into account their different characteristics such as: method of payment, friendly or hostile takeover, focus or diversication activity, managerial opportunism (cash ow), growth opportunities (MB), acquirers size, relative size of the target rm, public or private target. (a) Method of payment. The CAAR is positive when we focus on the domestic sub-sample, 0.45%, when the M&A is paid in cash,
(b)
(c)
(d)
(e)
(f)
(g)
(h)
and statistically different from zero, in accordance with Travlos (1987), Walker (2000), and Moeller et al. (2004). The CAAR is negative, though not statistically different from zero, when the method of payment is equity. The differences are not signicant. In cross-border M&As, the CAAR is positive for both methods of payment. The positive CAAR with equity payment is associated with the higher asymmetric information of target rms in foreign acquisitions, in line with Conn et al. (2005). Friendly vs. hostile takeover. The CAAR is positive for friendly M&As, 1.05% and negative for hostile ones, 4.51%. The differences are not signicant. When we focus on cross-border deals, the CAAR is higher for friendly M&As (1.44%) than for hostile ones (3.00%). The number of hostile takeovers is too small to support this effect. Focus vs. diversication. When we focus on purchases in the same industry or outside it, the CAAR is positive for both types of deal, 1.59% and 0.88%, respectively, in line with Martynova and Renneboog (2006). The differences are not signicant. Managerial opportunism. To compare CAAR with managerial opportunism, we divide the sample between above and below the median of the cash ow. The cash ow is dened as ebitda over acquiring total rm assets. The CAAR is positive and signicant (1.20%) for the sub-sample and above the median for the whole sample. When we focus on the sub-sample of domestic deals, the CAAR is 1.78% which is higher than for cross-border deals and also higher than for rms with cash ow below the median. These results do not support the argument regarding poor managerial behavior when rms have free cash-ow. The differences between cross-border and domestic M&As are signicant and support that more asymmetric information problems in crossborder M&As reduce the gains of acquiring rms. This result is in line with Moeller and Schlingemann (2005). Growth opportunities. This variable is proxied by the market-tobook ratio. We divide the sample between above and below the median of market to book ratio. The CAAR is positive for above and below the median, 0.82% and 1.44% for the whole sample. When we focus on the sub-sample below the median, the CAAR is higher for domestic M&As than for cross-border ones, 1.76% and 0.99%, respectively. And the CAAR for the domestic subsample below the median is higher than for the sub-sample above the median. These results support the argument that the shareholders value worse rms with high market-to-book ratios because they consider that these ratios represent overvaluation of the bidder shares, in line with Dong et al. (2006). Acquirers size. We consider rms to be larger when they fall within the rst quartile of capitalization in their stock market and smaller otherwise. The CAAR is positive for both the larger and the smaller rms, 0.85% and 1.23%, respectively. When we focus on the larger sub-sample, the CAAR is higher for domestic deals than for cross-border ones. And for the cross-border subsample, the CAAR is higher for the smaller rms (3.04%) than for the larger ones (0.50%). These results support the argument that shareholders value M&As better when the acquirers are smaller rms since these rms have more concentrated ownership and better-aligned interests between shareholders and managers, in line with Schwert (2000), Beitel et al. (2004), Moeller et al. (2004), and Faccio et al. (2006). Relative size of the target rm. When we focus on the relative size of the target rm we divide the sample between above or below the median of the relative size of target rm. This variable is dened as the value of the transaction divided by the market value of the acquiring rm four days before the transaction. The CAAR is positive for both above and below the median, 1.36% and 0.62%, respectively. The differences are not signicant. Public vs. private rms. The CAAR is negative when the target is a public rm, although it is not statistically different from
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Table 2 Descriptive statistics. Sample of 469 M&A announcements by European listed rms, target rms being listed and non-listed rms worldwide, for completed transactions between 2002 and 2006. We distinguish: 221 cross-border and 248 domestic transactions. The table shows the average value (as percentage, or dollars for some variables), with the standard deviation in parentheses. Non-parametric MannWhitney test of differences (p value). All (N = 469) Mean Deal characteristics Cash payment (%) Equity payment (%) Mixed payment (%) Others means of payment (%) Friendly (%) Related businesses (%) 100% acquired (%) Value of transactions (million $) Firm characteristics Relative size Total assets (million $) Cash ow to total assets Market-to-book Public target (%) Private target (%) Subsidiary target (%) Acquiring ownership (%)
* ** ***
Cross-border (N = 221) Stand. desv. (49.06) (32.95) (36.49) (46.60) (10.28) (48.93) (22.49) (3724.51) (5.28) (119818.60) (0.16) (1.03) (43.07) (49.94) (41.59) (19.37) Mean 46.15 8.15 12.67 33.03 98.64 67.42 95.93 942.20 0.36 35369.89 0.08 1.53 28.51 44.79 26.70 20.73 Stand. desv. (49.96) (27.41) (33.33) (47.13) (11.60) (46.97) (19.81) (3251.16) (1.48) (163143.30) (0.16) 1.11 (45.25) (49.84) (44.34) (16.83)
Domestic (N = 248) Mean 34.68 16.13 18.55 30.65 99.19 54.43 93.55 534.20 0.95 8712.505 0.11 1.21 20.97 60.89 18.14 23.08 Stand. desv. (47.69) (36.85) (38.95) (46.20) (8.96) (49.90) (24.62) (4097.61) (7.12) (54853.26) (0.15) 0.94 (40.79) (48.90) (38.61) (21.81)
Difference test (p value)
40.09 12.37 15.77 31.77 98.93 60.55 94.67 726.45 0.67 21364.47 0.09 1.35 24.52 53.30 22.17 21.85
(p = 0.01** ) (p = 0.008*** ) (p = 0.08* ) (p = 0.58) (p = 0.56) (p = 0.004*** ) (p = 0.25) (p = 0.000*** ) (p = 0.04** ) (p = 0.000*** ) (p = 0.21) (p = 0.0009*** ) (p = 0.058* ) (p = 0.000*** ) (p = 0.026** ) (p = 0.932)
Signicant at the 10% level. Signicant at the 5% level. Signicant at the 1% level.
Table 3 Cumulative Average Abnormal Return (CAAR) for the acquiring rm around the M&A announcement. Sample of 469 M&A announcements by European listed rms, target rms being listed and unlisted rms worldwide, for completed transactions between 2002 and 2006. Dodd and Warner T-test (1983). The test for difference is the MannWhitney non-parametric test. Event window 0 (1,+1) (2,+2) (2,+4) (4,+4) (5,+5) (10,+10) (2,0) (3,0) (4,0) (5,0) (6,0) (7,0) (0,+2) (0,+3) (0,+4) (0,+5) (0,+6) (0,+7)
* ** ***
CAAR 0.49% 0.99% 1.39% 1.44% 1.58% 1.11% 0.67% 0.84% 0.89% 0.99% 0.75% 0.89% 0.74% 1.04% 1.03% 1.08% 0.84% 0.72% 0.69%
Dodd and Warner test 4.63*** 7.44*** 7.41*** 6.28*** 6.04*** 4.07*** 2.51*** 4.33*** 3.94*** 4.05*** 2.74*** 3.23*** 2.46** 7.92*** 6.93*** 6.14*** 4.67*** 4.06*** 3.62***
CAAR domest. 0.43% 0.64% 0.90% 0.95% 0.75% 0.20% 0.09% 0.73% 0.62% 0.52% 0.15% 0.28% 0.18% 0.61% 0.54% 0.66% 0.49% 0.37% 0.43%
Dodd and Warner test 4.78*** 5.38*** 4.52*** 3.69*** 2.79*** 1.51 1.33 3.47*** 2.69*** 2.07** 0.88 1.27 0.83 5.12*** 4.15*** 3.82*** 3.13*** 3.04*** 2.93***
CAAR cross-border 0.54% 1.38% 1.95% 1.98% 2.53% 2.12% 1.32% 0.97% 1.20% 1.52% 1.43% 1.57% 1.38% 1.52% 1.58% 1.55% 1.23% 1.12% 0.99%
Dodd and Warner test 1.69* 5.14*** 6.02*** 5.23*** 5.85*** 4.34*** 2.25*** 2.64*** 2.90*** 3.70*** 3.07*** 3.37*** 2.71*** 6.10*** 5.70*** 4.90*** 3.49*** 2.70*** 2.17**
Difference test (p value) 0.12 0.41 0.89 0.91 0.35 0.28 0.96 0.55 0.97 0.61 0.31 0.57 0.75 0.45 0.86 0.59 0.56 0.39 0.42
zero. However, the CAAR is positive if the target is a private rm, 1.38%, and statistically different from zero. The difference between these two types of transaction, with public vs. private targets, is also signicant. These results tally with the positive valuation by acquiring rm shareholders of private target acquisitions, given the lower competition for the transaction and thus the lower price for the deal in accordance with Chang (1998), Fuller et al. (2002), Moeller et al. (2004), and Conn et al. (2005). The results are similar when we consider the cross-border subsample. The only difference is for public targets, with CAAR being negative, 0.28%, and signicant. The differences between the sub-samples are also statistically signicant. (i) Runup is dened as the CAAR of the acquiring rm 40 days before the deal, in the interval (60,2), in order to control possible insider trading on non-public information. Insider trad-
ing would mean that part of the valuation effect of takeovers would be already incorporated in the stock price prior to the M&A announcement (Bhattacharya, Daouk, Jorgenson, & Kehr, 2000; Faccio et al., 2006; Martynova & Renneboog, 2006, 2008, 2011). (j) Acquiring ownership structure. We dene this variable as the percentage of control rights held by the large shareholder in the acquiring rm.6 We also dene acquiring ownership concentration square. Acquiring rms with disperse ownership have fewer monitoring managers so there is a greater conict of
6 Following Martynova and Renneboog (2011), we focus on control rights more than on ownership in order to control for dual class shares, pyramidal ownership structures, multiple control chains, and cross-holdings.
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Table 4 Cumulative Average Abnormal Return (CAAR) for the acquiring rm according to rm and transaction characteristics. Sample of 469 M&A announcements by European listed rms, target rms being listed and unlisted rms worldwide, for completed transactions between 2002 and 2006. 248 domestic and 221 cross-border deals. Dodd and Warner T-test (1983) and the Corrado non-parametric test (1989) in parentheses. The test for difference is the MannWhitney non-parametric test. CAAR (1,+1) All DoddWarner Domestic (N = 248) 0.64%*** 0.45%*** 1.10% (p = 0.13) 6.79% 0.70%*** (p = 0.25) 1.06%** 0.84%*** (p = 0.21) 1.78%*** 0.13% (p = 0.03** ) 0.18% 1.76%*** (p = 0.009*** ) 1.17%*** 0.21%* (p = 0.85) 0.64%*** 0.64%*** (p = 0.24) 0.12% 0.84%*** (p = 0.13) DoddWarner Cross-border (N = 221) 1.38%*** 0.71%** 1.75% (p = 0.97) 3.00% 1.44%*** (p = 0.08* ) 1.58%*** 0.95%** (p = 0.77) 0.64% 2.13%*** (p = 0.27) 1.69%*** 0.99%** (p = 0.47) 0.50% 3.04%*** (p = 0.02** ) 2.22%*** 0.60%** (p = 0.32) 0.28%* 2.03%*** (p = 0.02** ) DoddWarner Diff. (domest cross-bord.) (p value) (p = 0.41) (p = 0.16) (p = 0.40)
Panel A: All (N = 469) 0.99%*** CAAR Panel B: Method of payment 0.59%*** Cash (N = 188) 0.21% Shares (N = 58) Difference (p = 0.21) Panel C: Friendly vs. hostile takeover 4.51% Hostile (N = 5) 1.05%*** Friendly (N = 469) (p = 0.04** ) Difference Panel D: Focus vs. diversication 1.06%*** Focus (N = 284) 0.88%*** Diversication (N = 185) (p = 0.40) Difference Panel E: Managerial opportunism (cash ow) 1.20%*** Above (N = 225) 1.01%*** Below (N = 225) Difference (p = 0.39) Panel F: Growth opportunities (MB) 0.82%*** Above (N = 226) 1.44%*** Below (N = 227) Difference (p = 0.13) Panel G: Acquirers size 0.85%*** Higher (N = 297) Smaller (N = 172) 1.23%*** Difference (p = 0.16) Panel H: Relative size of the target rm 1.36%*** Above (N = 234) Below (N = 235) 0.62%*** Difference (p = 0.11) Panel I: Public vs. private target 0.21% Public (N = 115) 1.38%*** Private (N = 354) Difference (p = 0.005*** )
a * ** ***
(7.44) (4.69) (0.38)
(5.38) (4.49) (1.25)
(5.34) (2.25) (0.99)a
(1.69)a (7.97)
(1.80)a (5.83)
(0.60)a (5.41)
(p = 0.40) (p = 0.56)
(6.10) (4.29)
(2.30) (3.86)
(4.85) (2.04)
(p = 0.90) (p = 0.16)
(5.62) (4.74)
(6.64) (1.57)
(1.34) (5.33)
(p = 0.02** ) (p = 0.28)
(3.60) (7.19)
(0.01) (7.63)
(4.93) (2.07)
(p = 0.20) (p = 0.02** )
(4.47) (6.41)
(5.31) (1.96)
(0.90) (7.42)
(p = 0.06* ) (p = 0.30)
(6.57) (3.96)
(4.54) (3.04)
(4.77) (2.55)
(p = 0.75) (p = 0.42)
(1.60) (9.48)
(0.48) (6.29)
(1.73) (7.17)
(p = 0.56) (p = 0.71)
Corrado test is shown in these cases. Signicant at the 10% level. Signicant at the 5% level. Signicant at the 1% level.
interest between managers and shareholders. On the other hand, rms with a higher level of concentration may suffer from entrenchment problems. So we expect a curvilinear relationship between ownership structure and acquiring shareholder valuation. Acquiring ownership structure might also proxy rm-level corporate governance. La Porta et al. (1998) hypothesize that countries with weak investor protection may have substitute corporate governance mechanisms, and nd a higher concentration of ownership in countries with lower levels of investor protection. Klapper and Love (2004) also nd that rm-level governance may matter more in countries with weaker investor protection. Table 5 shows the Cumulative Average Abnormal Return for acquiring-rm shareholders in (1,+1), according to the legal origin of the rms countries (La Porta et al., 1998): (a) Acquirer rms country. The CAAR is positive and signicant for both common law and civil law countries at 0.76% and 1.19%, respectively. The differences are not signicant. (b) Target rms country. The CAAR is higher for civil law than for common law countries and this difference is signicant for the cross-border subsample, 2.33% and 0.17%, respectively. The CAAR is also higher in domestic M&As (0.71%) than in crossborder ones (0.17%) when the target rms belong to a common law country.
4.2. Cross-border transaction valuation according to differences in the legal and institutional environment We will now analyze cross-border transactions, considering the characteristics of the legal and institutional environment of both the acquiring and the target rm. The variables we take into account for each country are the following: shareholder protection, creditor protection, economic freedom, stock market capitalization. We divide these variables into two groups: static (shareholder and creditor protection) and dynamic variables (economic freedom index and stock market capitalization). Shareholder and creditor protection is not calculated after 2003, so for our sample we have to consider these variables as static. Given that in the period of study there have been numerous changes in the corporate governance code all over the world, we prefer the economic freedom index variable, which is published annually.
4.2.1. Static corporate governance variables (a) The degree of shareholder protection (PSHARE). This variable proxies the quality of corporate governance in a country. It is calculated by multiplying the revised anti-director index calculated for 2003 (Djankov, La Porta, Lpez-de-Silanes, & Shleifer, 2008) by a measure of the rule of law, which rates the law-andorder tradition (Kaufmann, Kraay, & Mastruzzi, 2007), following Rossi and Volpin (2004) and Hagendorff et al. (2007). The
178
Table 5 Cumulative Average Abnormal Return (CAAR) for the acquiring rm according to legal environment. Sample of 469 M&A announcements by European listed rms, target rms being listed and unlisted rms worldwide, for completed transactions between 2002 and 2006. 248 domestic and 221 cross-border deals. Dodd and Warner T-test (1983) in parentheses. The test for difference is the MannWhitney non-parametric test. CAAR (1,+1) Panel A: All (N = 469) CAAR Panel B: Acquirers country Common law (N = 223) Civil law (N = 246) Difference Panel C: Targets country Common law (N = 241) Civil law (N = 228) Difference
** ***
All
DoddWarner
Domestic (N = 248) 0.64%*** 0.71%*** 0.55%*** (p = 0.37) 0.71%*** 0.55%*** (p = 0.37)
DoddWarner
Cross-border (N = 221) 1.38%*** 0.84%** 1.67%*** (p = 0.72) 0.17% 2.33%*** (p = 0.02** )
DoddWarner
Diff. (domest cross-bord.) (p value) (p = 0.41) (p = 0.23) (p = 0.88)
0.99%*** 0.76%*** 1.19%*** (p = 0.54) 0.49%*** 1.51%*** (p = 0.40)
(7.44) (5.12) (5.40)
(5.38) (4.81) (2.80)
(5.34) (2.28) (4.72)
(3.61) (6.97)
(4.81) (2.80)
(-0.02) (6.90)
(p = 0.02** ) (p = 0.31)
Signicant at the 5% level. Signicant at the 1% level.
Table 6 Cumulative Average Abnormal Return (CAAR) (1,+1) for the acquiring rm, according to the differences in the legal and institutional environment. Sample of 221 crossborder M&A announcements by European listed rms, target rms being listed and unlisted rms worldwide, for completed transactions between 2002 and 2006. Dodd and Warner T-test (1983) and the Corrado non-parametric test (1989) included in parentheses below the CAAR. The test for difference is the MannWhitney non-parametric test. CAAR (1,+1) Shareholder protection (N = 221) % t-test Creditor protection (N = 221) % t-test Economic freedom (N = 221) % t-test Stock market capitalization (N = 221) % 0.51** 0.65 t-test (2.26) (0.94) (p = 0.65)
Panel A: Positive or negative differences between acquirer and target index 1.11*** (4.44) Stronger in acquirer country (1) Weaker in acquirer country (3) 1.83*** (2.65) (p = 0.96) Difference (p value) CAAR (1,+1) Shareholder protection (N = 108) % t-test
1.13*** (4.46) 1.79*** (2.64) (p = 0.84) Creditor protection (N = 120) % t-test
1.22*** (4.32) 1.51*** (2.99) (p = 0.45) Economic freedom (N = 83) % t-test
Stock market capitalization (N = 111) % 0.43 0.42* t-test (0.76) (1.71) (p = 0.58)
Panel B: Acquirer index is above (below) and target index is below (above) according to the median of target index 0.78* (1.71) 0.69* (1.81) 0.42 (0.78) Stronger in acquirer country (1) 0.69** (2.19) 1.94*** (3.24) 0.48 (1.59) Weaker in acquirer country (3) Difference (p value) (p = 0.20) (p = 0.12) (p = 0.45)
* ** ***
revised anti-director index in Djankov et al. (2008) covers 72 countries and addresses some of the concerns about ambiguity in the denition of the index components and mistakes in coding (Pagano & Volpin, 2005; Spamann, 2005).7 (b) Creditor protection (PCREDITOR). We multiply the creditor rights index calculated for 2003 as dened by Djankov, McLiesh, and Sheleifer (2003), a proxy for the possibility of debt nancing, by the measure of legal efciency (rule of law).8
7 The anti-director rights index may theoretically take a value as high as six when: (1) the law of the country explicitly mandates proxy vote; (2) shareholders are not required to deposit their shares prior to a general shareholders meeting; (3) the law explicitly mandates cumulative voting; (4) an oppressed minority mechanism is in place; (5) listing rules explicitly mandate pre-emptive rights for shareholders; and (6) the minimum percentage of share capital that entitles a shareholder to call for an extraordinary meeting is less than 10%. 8 The creditor rights index includes four component variables, each of which can increment the creditor rights index by one if: (1) the reorganization procedure imposes restrictions, such as creditors consent to le for reorganization; (2) the reorganization procedure does not prevent secured creditors from gaining possession of their secured assets; (3) secured creditors are ranked rst in the distribution of proceeds of the assets of the bankrupt rm; and (4) the debtor does not retain administration of its property pending reorganization.
4.2.2. Dynamic economic and nancial development variables (c) Economic freedom (EFREEDOM). This variable is taken from the Heritage Foundation. It is an index to measure the degree of economic freedom within a country, collected for each host country. It is based on 10 specic freedom-related criteria, such as trade policy, taxation, government intervention, foreign investment policy, banking, pricing controls, property rights, and regulation. A lower score proxies for a weak legal and institutional environment (Francis et al., 2008; Moeller & Schlingemann, 2005). (d) Stock market capitalization (MKCAP). This is a measure of the size of the countrys stock market. It is dened as the market capitalization of a country as a percentage of its gross domestic product one year prior to the acquisition, obtained from the World Development Indicator (World Bank). Greater stock market capitalization implies more nancial developed markets. Table 6 shows the Cumulative Average Abnormal Return for acquiring-rm shareholders according to the differences between the acquiring and target rm legal and institutional environments. Panel A considers a stronger legal and institutional environment in the acquirer country when the acquirer index is higher than the target index for each characteristic, and a weaker legal and institutional environment when the acquirer index is lower than the
179
Table 7 Correlation matrix. The sample consists of 221 cross-border M&A announcements by European listed rms (2002-2006). The variables of the legal and institutional environments are dened as the difference in each characteristic between acquiring and the target rm: Shareholder protection (DFSHAREBT ), Creditor protection (DFCREDITORBT ), Economic freedom (DFEFREEDOMBT ), and Stock market capitalization (DFMKCAPBT ). Variables DFSHAREBT DFCREDITORBT DFEFREEDOMBT DFMKCAPBT
* ***
DFSHAREBT 1.000 0.7847*** 0.6593*** 0.2491***
DFCREDITORBT 1.000 0.5086*** 0.1203*
DFEFREEDOMBT
DFMKCAPBT
1.000 0.2720***
1.000
Signicant at the 10% level. signicant at the 1% level.
Table 8 Probability of the acquiring rm participating in a cross-border transaction. Heckman sample selection models. Dependent variable: the probability that a bidder rm announces a cross-border M&A. Explanatory variables: legal and institutional environment and control variables. The sample consists of 221 cross-border M&A announcements by European listed rms (20022006). (1) (2) (3) (4) (5) Non nancial rms 0.2838* (1.76) 0.6046 (0.67) 0.0583 (0.69) 0.6015*** 2.93 0.2510 1.27 2.9565** 2.11 3.9543* (1.95) 0.1310*** (2.73) 0.1582*** (4.45) 0.0382*** (2.90) 0.5241** (2.40) Yes Yes 333 0.0127 46.00 Yes Yes 331 0.0001 62.32 Yes Yes 333 0.0008 56.35 Yes Yes 333 0.0105 55.79 Yes Yes 320 0.0054 48.02 Yes Yes 318 0.0001 61.09 Yes Yes 320 0.0002 59.39 0.0417*** (3.08) 0.5693** (2.52) Yes Yes 320 0.0001 61.04 (6) Non nancial rms 0.2845* (1.73) 0.6325 (0.69) 0.0530 (0.62) 0.6478*** (3.08) 0.2232 (1.13) 3.4130** 2.35 4.3753** (2.06) (7) Non nancial rms 0.2626 (1.62) 0.6615 (0.74) 0.0548 (0.66) 0.6097*** (2.96) 0.2540 (1.28) 3.2076** (2.24) 4.2786** (2.06) (8) Non nancial rms 0.2895* (1.79) 0.9372 (1.01) 0.0502 (0.6) 0.5931*** (2.89) 0.2602 (1.31) 2.8962** (2.08) 4.0623** (2.02)
Panel A: Deal and rm characteristics 0.2965* FOCUS 0.2987* (1.90) (1.86) CFLOW 0.9347 0.9785 (1.11) (1.15) 0.0480 0.0433 MB (0.52) (0.58) 0.4977** 0.5321*** SIZE (2.53) (2.65) LISTED 0.2040 0.1710 (0.87) (1.05) OWNERSHIP 3.0484** 3.5114** (2.21) (2.46) 4.0551** 4.4765** OWNERSHIP2 (2.03) (2.14) Panel B: Legal and institutional characteristics ** 0.1199 PSHAREB (2.56) PCREDITORB 0.1487*** (4.26) EFREEDOMB MKCAPB Years Sector Observations Prob > chi Wald chi
* ** ***
0.2813* (1.78) 0.9811 (1.16) 0.0441 (0.53) 0.5037 (2.55)** 0.2064 (1.06) 3.2838** (2.33) 4.3544** (2.13)
0.3059* (1.94) 1.2145 (1.39) 0.0410 (0.50) 0.4951** (2.51) 0.2139 (1.09) 2.9716** (2.17) 4.1253** (2.08)
target index. Panel B shows the results of an alternative classication that considers a stronger legal and institutional environment in the acquirer country when the index is above the median of the target index and the target is below this median. Our classication considers a weaker legal and institutional environment when the acquirer index is below the median and the target is above this median, following Martynova and Renneboog (2008). According to this later classication there are fewer observations for each sub-sample. 5. Determinants of acquiring-rms abnormal returns We carry out a multivariate analysis in order to test the determinants of the acquiring-rm shareholders valuation of the M&A announcement as a whole. Besides considering transaction and rm characteristics, we also examine the inuence of the legal and institutional environment of both the acquiring and the target rm on cross-border deals.
5.1. Explanatory model of the acquiring-rm shareholders valuation The specication of the model to test the hypotheses is as follows: CARi,j = 0 + 1 Xi + 2 INSTIi + 3 TOTAL INSTIi + 4 LISTED INSTIi + i,j The dependent variable (CARi ) is the estimated 3-day (1,+1) cumulative abnormal return of acquiring European rms around the announcement date of a transaction. The Xi variable is a variable vector which incorporates both rm and transaction characteristics and includes the following variables, mainly dened as dichotomous variables: Method of payment (CASH), which has a value of 1 if the M&A is paid exclusively in cash; Acquirer attitude regarding the takeover (FRIEND), which has a value of 1 if friendly; Focus activity (FOCUS), which has a value of 1 if the main line of business for both rms bear the same two digits of the
180
Table 9 Determinants of acquirer abnormal returns: cross-border transaction. Least square regressions. Dependent variable: cumulative abnormal return in the event window (1,+1). Explanatory variables: legal and institutional environment and control variables. The sample consists of 221 cross-border M&A announcements by European listed rms (20022006). (1) (2) (3) (4) (5) Non nancial rm 0.0080 (0.64) (omitted) 0.0230 (1.27) 0.0250 (0.30) 0.0110 (1.40) 0.0241 (0.88) 0.0103*** (3.09) 0.0415* (1.93) 0.0577 (0.90) 0.1168*** (3.01) 0.2728** (2.06) 0.3971** 2.29 0.0019 (0.82) 0.0015 (0.62) 0.0001 (0.19) 0.0241* (1.85) Yes Yes 155 0.0127 46.00 0.1011* (1.69) Yes Yes 154 0.0001 62.32 0.0621 (1.52) Yes Yes 155 0.0008 56.35 0.0799* (1.78) Yes Yes 155 0.0009 55.79 0.0837 (1.57) Yes Yes 151 0.0054 48.02 0.1005* (1.78) Yes Yes 150 0.0001 61.09 0.0764* (1.90) Yes Yes 151 0.0002 59.39 0.0753* (1.80) 0.0002 (0.34) 0.0247* (1.90) Yes Yes 151 0.0001 61.04 0.0723 (1.46) (6) Non nancial rm 0.0095 (0.81) (omitted) 0.0191 (1.24) 0.0161 (0.23) 0.0098 (1.47) 0.0149 (0.68) 0.0108*** (3.44) 0.0461** (2.56) 0.0430 (0.74) 0.1216*** (3.35) 0.2443** (2.17) 0.3554** (2.47) (7) Non nancial rm 0.0100 (0.85) (omitted) 0.0194 (1.24) 0.0200 (0.28) 0.0094 (1.41) 0.0153 (0.69) 0.0100*** (3.20) 0.0461** (2.42) 0.0435 (0.75) 0.1136*** (3.10) 0.2289** (2.14) 0.3443** (2.44) (8) Non nancial rm 0.0074 (0.63) (omitted) 0.0196 (1.25) 0.0244 (0.35) 0.0088 (1.34) 0.0217 (0.87) 0.0093*** (2.94) 0.0391** (2.04) 0.0470 (0.85) 0.1147*** (3.11) 0.2432** (2.20) 0.3552** (2.44)
Panel A: Deal and rm characteristics 0.0076 0.0088 CASH (0.75) (0.60) (omitted) (omitted) FRIEND 0.0153 FOCUS 0.0226 (1.20) (1.02) CFLOW 0.0310 0.0083 (0.37) (0.12) 0.0103 0.0090 MB (1.44) (1.33) 0.0126 SIZE 0.0240 (0.93) (0.63) *** 0.0092*** RSIZE 0.0089 (2.79) (3.02) 0.0472*** LISTED 0.0422** (1.99) (2.79) 0.0366 TOTAL 0.0542 (0.84) (0.66) 0.1168*** 0.1190*** RUNUP (3.07) (3.29) 0.2646* 0.2129* OWNERSHIP (1.95) (1.95) OWNERSHIP2 0.3872** 0.3184** (2.18) (2.3) Panel B: Legal and institutional characteristics DFSHAREBT 0.0013 (0.57) DFPCREDITORBT 0.0003 (0.12) DFEFREEDOMBT DFMKCAPBT Years Sector Observations Prob > chi Wald chi Lambda
* ** ***
0.0094 (0.81) (omitted) 0.0193 (1.18) 0.0234 (0.33) 0.0090 (1.35) 0.0171 (0.81) 0.0088*** (2.93) 0.0461** (2.44) 0.0420 (0.72) 0.1146*** (3.19) 0.2281** (2.05) 0.3428** (2.34)
0.0069 (0.59) (omitted) 0.0203 (1.2) 0.0259 (0.35) 0.0087 (1.28) 0.0255 (1.08) 0.0081*** (2.67) 0.0381** (1.97) 0.0463 (0.81) 0.1144*** (3.18) 0.2476** (2.09) 0.3606** (2.31)
SIC code; Acquiring rm size (SIZE), which has a value of 1 if the rm falls within the rst quartile of market capitalization at the end of the semester prior to the transaction announcement; Target rm listing (LISTED), which has a value of 1 if the target rm is listed on the market; Managerial opportunism (CFLOW), dened as cash ow between all acquiring rm assets; Growth opportunities (MB), approximated as the market-to-book ratio of the acquiring rm; Relative size of the acquired rm (RSIZE), calculated as a logarithm of the value of the transaction divided by the market value of the acquiring rm four days before the transaction; Acquisition of 100% (TOTAL), which is a dummy variable that equals 1 if the bidder fully acquires the target and hence holds 100% of the share capital after completion of the deal, and equals zero otherwise; Runup (RUNUP), as the CAAR of the acquiring rms 40 days before the deal, in the interval (60,2); Acquiring ownership structure (OWNERSHIP) dened as the percentage of control right held by the largest shareholder in the acquiring rm and Acquiring ownership structure square (OWNERSHIP2). The INSTI variable groups together variables concerning the characteristics of the legal and institutional environment of both the acquiring and the target rm, as dened in the previous section.
The explanatory variables are dened as the difference in each characteristic between the acquiring and the target rm9 : Shareholder protection (DFPSHAREBT ), Creditor protection (DFPCREDITORBT ), Economic freedom (DFEFREEDOMBT ), and Stock market capitalization (DFMKCAPBT ). The Appendix A includes a table which summarizes the denition of the variables and expected relationships. 5.2. Controlling for selection bias The decision on a cross-border acquisition is an endogenous choice made by the acquiring and the target rms. Rossi and Volpin (2004) nd that acquirers and targets from countries with high shareholder protection are more likely to be involved in domestic rather than cross-border M&As. Therefore, an acquiring rm from a country with high shareholder protection undertakes a cross-border acquisition if the takeover synergies exceed the higher cost of a foreign bid. In this case there will be a positive rela-
9 We also consider the variable for the acquiring and the target rm separately, but the results are not signicant.
181
Table 10 Probability of the acquiring rm participating in a cross-border transaction. Heckman sample selection models. Dependent variable: the probability that a bidder rm announces a cross-border M&A. Explanatory variables: legal and institutional environment and control variables. The sample consists of 221 cross-border M&A announcements by European listed rms (20022006). (1) (2) (3) (4) (5) Non nancial rms 0.2838* (1.76) 0.6046 (0.67) 0.0583 (0.69) 0.6015** (2.93) 0.2510 (1.27) 2.9565** (2.11) 3.9543* (1.95) 0.1310*** (2.73) 0.1582*** (4.45) 0.0382*** (2.90) 0.5242** (2.40) Yes Yes 333 0.0007 56.72 Yes Yes 331 0.0001 62.25 Yes Yes 333 0.0192 44.32 Yes Yes 333 0.0003 59.92 Yes Yes 320 0.0001 60.78 Yes Yes 318 0.0000 64.72 Yes Yes 320 0.0016 52.46 0.0417*** (3.08) 0.5693** (2.52) Yes Yes 320 0.0000 64.72 (6) Non nancial rms 0.2845* (1.73) 0.6325 (0.69) 0.0530 (0.62) 0.6478*** (3.08) 0.2232 (1.13) 3.4130** (2.35) 4.3753** (2.06) (7) Non nancial rms 0.2626* (1.62) 0.6615 (0.74) 0.0548 (0.66) 0.6097*** (2.96) 0.2540 (1.28) 3.2076** (2.24) 4.2786** (2.06) (8) Non nancial rms 0.2895* (1.79) 0.9372 (1.01) 0.0502 (0.60) 0.5931*** (2.89) 0.2602 (1.31) 2.8962** (2.08) 4.0623** (2.02)
Panel A: Deal and rm characteristics 0.2987* 0.2965* FOCUS (1.90) (1.86) 0.9347 0.9785 CFLOW (1.11) (1.15) MB 0.0480 0.0433 (0.58) (0.52) SIZE 0.4977** 0.5321** (2.53) (2.65) 0.2040 0.1710 LISTED (0.87) (1.05) 3.0484** 3.5114** OWNERSHIP (2.21) (2.46) 4.0551** 4.4765** OWNERSHIP2 (2.03) (2.14) Panel B: Legal and institutional characteristics 0.1199** PSHAREB (2.56) 0.1487*** PCREDITORB (4.26) EFREEDOMB MKCAPB Years Sector Observations Prob > chi Wald chi
* ** ***
0.2813* (1.78) 0.9811 (1.16) 0.0441 (0.53) 0.5037 (2.55) 0.2064 (1.06) 3.2838** (2.33) 4.3544** (2.13)
0.3059* (1.94) 1.2145 (1.39) 0.0410 (0.50) 0.4951** (2.51) 0.2139 (1.09) 2.9716** (2.17) 4.1253** (2.08)
tionship between acquirer shareholder protection and the acquirer rm return around the announcement date of cross-border M&As (Martynova & Renneboog, 2008). This endogeneity issue may affect our analysis. We control for selection bias in cross-border M&As following Heckman (1976, 1979) procedure. In the rst stage we estimate a probit model to analyze the probability that a European bidder will undertake a cross-border rather than a domestic M&A. In the second stage we include Heckmans Lambda (or inverse Mills ratio) as an additional regressor in regressions on the acquirer returns to correct this potential endogeneity problem. In the rst stage we consider the following variables. The dependent variable is the probability that a European rm will take a cross-border M&A. The explanatory variables are: focus, cash ow, market-to-book ratio, acquirers size, listed target rms and acquirers legal and institutional variables, as dened in the previous section. We consider variables in relation to the legal and institutional environment sequentially, unlike Martynova and Renneboog (2008), because of the high correlation among them (Table 7). The results of the probit regression are reported in Table 8. In model 1 we consider shareholder protection in the acquirer country (PSHAREB ) as a legal and institutional variable. Regarding the characteristics of the deal and rms, transactions in related industries (FOCUS) have a positive effect on the probability of an acquiring rm being involved in a cross-border M&A (0.30). Deals between rms from the same industry reduce the asymmetric information problems. The acquirers size (SIZE) also has a positive effect. The acquiring ownership structure (OWNER and OWNER2) has a curvilinear impact on the probability of undertaking a cross-border M&A.
The variable OWNER has a negative and signicant sign. A positive and signicant sign is found by the variable OWNER2. We obtain the inexion point of the curvilinear relationship at 37.60%. Acquiring rms with a large shareholder who held more than 37.60% of control right make more cross-border M&As than domestic ones. For legal and institutional characteristics, strong shareholder protection in the acquirer country (PSHAREB ) has a negative inuence on the probability of cross-border M&As. These results support the argument that rms from countries with a weak legal and institutional environment are more likely to invest abroad than domestically (Benos & Weisbach, 2004; Doidge, Karolyi, & Stulz, 2007). Martynova and Renneboog (2008) found the same results when they consider their own measure of shareholder rights. They also found that acquiring abroad is more probable when minority shareholder protection and creditor protection in the home country are higher. Martynova and Renneboog (2011) argue that in cross-border M&As the use of debt nancing is more likely. They claim that cross-border M&As are more likely to be undertaken by acquiring rms with cheaper debt capital, which generally occurs in countries where creditor rights are strong. In models 24, we consider creditor protection (PCREDITORB ), economic freedom index (EFREEDOMB ) and stock market capitalization (MKCAPB ) as proxies for the legal and institutional environment in the bidder country. The results do not differ from previous models.10
10 We control for years and sector dummy. We also include the GDP per capita for acquiring-rm country to control other country effects.
182
Table 11 Determinants of acquirer abnormal returns: cross-border transaction. Least square regressions. Dependent variable: cumulative abnormal return in the event window (1,+1). Explanatory variables: legal and institutional environment and control variables. The sample consists of 221 cross-border M&A announcements by European listed rms (20022006). (1) (2) (3) (4) (5) Non nancial rm 0.0079 (0.68) (omitted) 0.0174 (1.11) 0.0080 (0.11) 0.0110 (1.60) 0.0203 (0.89) 0.0103*** (3.32) 0.0455** (2.50) 0.0471 (0.82) 0.1114*** (3.08) 0.2515** (2.26) 0.3690** (2.51) 0.0228 (1.38) 0.0096 (0.62) 0.0406** (2.12) 0.0331** (2.12) Yes Yes 155 0.0007 56.72 0.0860* (1.81) Yes Yes 154 0.0001 62.25 0.0639** (2.17) Yes Yes 155 0.0192 44.32 0.1076** (2.04) Yes Yes 155 0.0003 59.92 0.0754 (1.54) Yes Yes 151 0.0001 60.78 0.0812* (1.83) Yes Yes 150 0.0000 64.72 0.0641** (2.28) Yes Yes 151 0.0016 52.46 0.0994** (2.13) 0.0398** (2.23) 0.0320** (2.06) Yes Yes 151 0.0000 64.72 0.0639 (1.39) (6) Non nancial rm 0.0102 (0.87) (omitted) 0.0170 (1.22) 0.0109 (0.16) 0.0094 (1.49) 0.0107 (0.56) 0.0108*** (3.42) 0.0488** (2.92) 0.0417 (0.75) 0.1193*** (3.28) 0.2265** (2.27) 0.3356** (2.58) (7) Non nancial rm 0.0108 (0.86) (omitted) 0.0251 (1.44) 0.0165 (0.20) 0.0093 (1.22) 0.0330 (1.28) 0.0095*** (2.88) 0.0304 (1.41) 0.0171 (0.26) 0.1212*** (3.14) 0.2459** (2.01) 0.3508** (2.17) (8) Non nancial rm 0.0100 (0.85) (omitted) 0.0190 (1.26) 0.0306 (0.45) 0.0086 (1.35) 0.0188 (0.80) 0.0092*** (2.90) 0.0380** (2.03) 0.0299 (0.54) 0.1147*** (3.12) 0.2011* (1.94) 0.2967** (2.17)
Panel A: Deal and rm characteristics 0.0074 0.0093 CASH (0.80) (0.63) (omitted) (omitted) FRIEND 0.0160 FOCUS 0.0182 (1.11) (1.15) CFLOW 0.0152 0.0096 (0.21) (0.15) 0.0106 0.0091 MB (1.46) (1.53) 0.0130 SIZE 0.0227 (1.04) (0.72) *** 0.0093*** RSIZE 0.0088 (2.97) (3.06) 0.0478** LISTED 0.0442** (2.42) (2.91) 0.0388 TOTAL 0.0457 (0.78) (0.69) 0.1123*** 0.1190*** RUNUP (3.16) (3.32) 0.2482** 0.2164** OWNERSHIP (2.14) (2.15) OWNERSHIP2 0.3650** 0.3218** (2.38) (2.46) Panel B: Legal and institutional characteristics WEAKERPSHAREBT 0.0193 (1.18) WEAKERPCREDITORBT 0.0085 (0.55) WEAKEREFREEDOMBT WEAKERMKCAPBT Years Sector Observations Prob > chi Wald chi Lambda
* ** ***
0.0104 (0.77) (omitted) 0.0267 (1.39) 0.0290 (0.33) 0.0089 (1.09) 0.0343 (1.33) 0.0084** (2.47) 0.0296 (1.30) 0.0155 (0.22) 0.1218*** (2.99) 0.2524* (1.89) 0.3577** (2.02)
0.0095 (0.81) (omitted) 0.0200 (1.24) 0.0329 (0.46) 0.0085 (1.29) 0.0232 (1.05) 0.0080** (2.65) 0.0363* (1.93) 0.0285 (0.51) 0.1149*** (3.20) 0.2054* (1.87) 0.3018** (2.07)
5.3. Results: determinants of the acquiring-rm shareholders valuation In this section we develop acquirer return regression analysis to examine the impact of the legal and institutional environment, as well as rm and transaction characteristics, as control variables, while we control for the fact that making a cross-border acquisition is an endogenous decision (selection bias problem). The dependent variable is the cumulative abnormal return (CAR) (1,+1) for acquiring-rm shareholders at the cross-border M&A announcement. The explanatory variables are those described in Section 5.1. Table 9 shows the results of acquirer return regression in the second stage. Model 1 considers the difference in shareholder protection between acquirer and target country (DFPSHAREBT ). Among the classic explanatory variables, the following are signicant. The relative size of the target (RSIZE) has a positive effect, in line with Fuller et al. (2002) and Moeller and Schlingemann (2005). Public target acquisition (LISTED) has a negative impact on CAR. These results are in line with the univariate analysis and support the fact that, in this type of acquisitions, potential buyer competition
increases the price of the deal. The runup (RUNUP) of the acquiring rms has a positive effect on CAR, indicating that insider information is incorporated before the M&A announcement, in line with Faccio et al. (2006) and Martynova and Renneboog (2006, 2008, 2011). The acquiring ownership structure (OWNER and OWNER2) has the expected curvilinear impact on CAR. The positive effect of OWNER on CAR indicates that a certain level of control right who held by a large shareholder reduces the conict of interest between managers and shareholders. The expected negative effect of OWNER2 supports the argument that a higher level of control right held by a large shareholder favors the entrenchment effect and suboptimal M&A decisions. We obtain the inexion point of the curvilinear relationship at 34.17%. Acquiring rms with a large shareholder held more than 34.17% of control right make worse acquisition decisions. Among the institutional variables, the difference in shareholder protection between the countries of the rms involved in the M&A (DFPSHAREBT ) is not signicant. In models 24, we consider the differences in the creditor protection (DFPCREDITORBT ), economic freedom index (DFEFREEDOMBT ) and stock market capitalization (DFMKCAPBT ). The difference between acquiring and target rms countries when we consider the stock
183
Table 12 Probability of the acquiring rm participating in a cross-border transaction. Heckman sample selection models. Dependent variable: the probability that a bidder rm announces a cross-border M&A. Explanatory variables: legal and institutional environment and control variables. The sample consists of 221 cross-border M&A announcements by European listed rms (20022006). (1) Panel A: Deal and rm characteristics 0.2813* FOCUS (1.78) 0.9811 CFLOW (1.16) MB 0.0441 (0.53) 0.5037** SIZE (2.55) 0.2064 LISTED (1.06) OWNERSHIP 3.2838** (2.33) 4.3544** OWNERSHIP2 (2.13) Panel B: Legal and institutional characteristics 0.0382*** EFREEDOMB (2.90) Years Sector Observations Prob > chi Wald chi
* ** ***
(2)
(3)
(4) Non nancial rms 0.2626 (1.62) 0.6615 (0.74) 0.0548 (0.66) 0.6097*** (2.96) 0.2540 (1.28) 3.2076** (2.24) 4.2786** (2.06) 0.0417*** (3.08) Yes Yes 320 0.0063 50.09
0.2813* (1.78) 0.9811 (1.16) 0.0441 (0.53) 0.5037** (2.55) 0.2064 (1.06) 3.2838** (2.33) 4.3544** (2.13) 0.0382*** (2.90) Yes Yes 333 0.0011 59.44
0.2813* (1.78) 0.9811 (1.16) 0.0441 (0.53) 0.5037** (2.55) 0.2064 (1.06) 3.2838** (2.33) 4.3544** (2.13) 0.0382*** (2.90) Yes Yes 333 0.0004 60.04
Yes Yes 333 0.0487 42.68
market capitalization variable has a positive and signicant effect on the acquiring shareholder valuation. These results support our rst Hypothesis 1: a weaker (stronger) legal and institutional environment in the target country has a positive (negative) inuence on acquirer shareholder return, owing to shareholder wealth expropriation in the target rms country. In a weaker legal and institutional environment, the less active and less competitive corporate control markets increase the likelihood of funding undervalued target rms. We now consider other variables that cover the discrete effect of the differences between the bidder and target rms legal and institutional environments using dummy variables. The rst variable (STRONGER) is equal to 1 when the acquirers legal and institutional variable is above the median of the target country and the target is below this median. The second one (WEAKER) is dened in the inverse way. It is 1 when the acquirers environment is below the median and the target is above this median. And the third one (BOTH) is equal to 1 when both acquirer and target are above the median and zero otherwise. Table 10 reports probit regression and Table 11 reports these results. The classic explanatory variables have a similar effect to that in the previous models, in all the estimations. Regarding the institutional variables, in model 1, weaker acquiring rm shareholder protection (WEAKERPSHAREBT ) (when the value is below the median in the acquirer country and above this median in the target country) has a negative effect, but it is not signicant. In models 3 and 4, weaker acquirer economic freedom (WEAKEREFREEDOMBT ) and weaker stock market capitalization (WEAKERMKCAPBT ) also have a negative effect, which is statistically signicant. In other models that are not reported, we consider that both rms are above the median (BOTHBT ) of the legal and institutional this variable is not signicant. These results support Hypothesis 1: a weaker legal and institutional environment in the acquiring country has a negative
inuence on acquirer shareholder return, owing to fewer opportunities to buy undervalued rms and the negative spillover of the corporate law. Conversely, we do not nd evidence about acquiring-rm gains when the target rms belong to countries with weak legal and institutional environments. These results are not in line with Martynova and Renneboog (2008) in their analysis of European acquiring-rm shareholder valuation, since they nd a positive sign of the stronger and weaker legal and institutional environments of target rms. These differences may be explained by the differences in the database analyzed, given that our study also considers target rms from countries outside the European Union, which have greater differences in their legal and institutional environments. The periods analyzed also differ. The more recent period examined in this study includes the sixth M&A wave and considers relevant economic changes for M&A activity, which may increase transaction costs in countries with a stronger legal and institutional environment. The estimated models reveal that Heckmans Lambda is signicant, conrming that the selection bias may induce estimation problems (Table 12). In Table 13 model 1 we regress the interaction variable to test the hypotheses in relation to the more positive effect of the weaker legal and institutional environment in the target country on the acquiring-rm shareholders return when the acquirer buys all the target rms shares (Hypothesis 1.1) and the more negative effect of the stronger legal and institutional environment in the target country when the acquirer buys a public rm (Hypothesis 1.2). We consider the economic freedom index to be a proxy for the legal and institutional variable. These interaction terms are not signicant. In models 2 and 3 we regress the inuence of the interaction of cash payment (CASH) and a public target (LISTED) on the bidder return. The effect of this interaction (CASH LISTED) is positive and signicant. The negative effect of listed rms is null when payment is in cash. This result is in line with Ofcer et al. (2009), who observe the positive effect of equity payment in private target acquisitions.
184
Table 13 Determinants of acquirer abnormal returns: cross-border transaction. Least square regressions. Dependent variable: cumulative abnormal return in the event window (1,+1). Explanatory variables: legal and institutional environment and control variables. The sample consists of 221 cross-border M&A announcements by European listed rms (20022006). (1) Panel A: Deal and rm characteristics CASH 0.0120 (0.85) FRIEND (omitted) FOCUS 0.0277 (1.40) CFLOW 0.0337 (0.38) MB 0.0083 (0.99) 0.0366 SIZE (1.37) RSIZE 0.0082** (2.34) 0.0320 LISTED (1.33) TOTAL 0.0060 (0.08) RUNUP 0.1227 (2.94) 0.2541* OWNERSHIP (1.84) OWNERSHIP2 0.3619* (1.98) Panel B: Legal and institutional characteristics 0.0430** WEAKEREFREEDOMBT (2.13) Panel C: Interations 0.0227 LISTED INSTI (0.56) TOTAL INSTI 0.0008 (0.04) LISTED CASH Years Sector Observations Prob > chi Wald chi Lambda
* ** ***
(2) 0.0013 (0.09) (omitted) 0.0254 (1.45) 0.0299 (0.38) 0.0066 (0.89) 0.0260 (1.08) 0.0098*** (3.09) 0.0746** (2.52) 0.0104 (0.16) 0.1240 (3.37) 0.2293* (1.88) 0.3398** (2.11) 0.0387** (2.17) 0.0378 (1.04) 0.0014 (0.08) 0.0579* (1.98) Yes Yes 155 0.0011 59.44 0.0969** (2.02)
(3) 0.0016 (0.12) (omitted) 0.0243 (1.42) 0.0238 (0.31) 0.0077 (1.07) 0.0241 (1.03) 0.0099*** (3.18) 0.0645** (2.30) 0.0247 (0.39) 0.1223 (3.40) 0.2323* (1.95) 0.3386** (2.15) 0.0353** (2.06)
(4) Non nancial rm 0.0126 (0.95) (omitted) 0.0262 (1.45) 0.0208 (0.25) 0.0087 (1.10) 0.0357 (1.33) 0.0093** (2.73) 0.0331 (1.44) 0.0067 (0.10) 0.1223*** (3.07) 0.2480* (1.96) 0.3556** (2.12) 0.0423** (2.25) 0.0246 (0.65) 0.0016 (0.09)
(5) Non nancial rm 0.0011 (0.09) (omitted) 0.0245 (1.55) 0.0215 (0.29) 0.0067 (0.98) 0.0235 (0.98) 0.0110*** (3.57) 0.0774 (2.77)** 0.0116 (0.20) 0.1245*** (3.56) 0.2241** (2.02) 0.3348** (2.29) 0.0378** (2.28) 0.0400 (1.20) 0.0007 (0.04) 0.0596** (2.19) Yes Yes 151 0.0000 70.52 0.0884** (2.08)
(6) Non nancial rm 0.0015 (0.11) (omitted) 0.0232 (1.49) 0.0154 (0.21) 0.0080 (1.17) 0.0215 (0.90) 0.0111*** (3.57) 0.0666 (2.47)** 0.0268 (0.45) 0.1225*** (3.48) 0.2267** (2.06) 0.3329** (2.30) 0.0343** (2.01)
0.0488* (1.74) Yes Yes 155 0.0004 60.04 0.0951** (2.02) Yes Yes 151 0.0063 50.09 0.1023** (2.12)
0.0501* (1.88) Yes Yes 151 0.0000 68.58 0.0864** (2.04)
Yes Yes 155 0.0487 42.68 0.1102** (2.03)
We regress all models considering non-nancial rms separately from nancial ones (models 58). The results are not different from the results shown for the whole sample. We also regress the previous models for different intervals (2,+2); (4,+4); (5,+5); (20,+20) and we obtain similar results. 6. Conclusions This study explores the inuence of the legal and institutional environment on European acquiring-rm returns around the announcement date of cross-border M&As when target rms are not only from Europe, but also from any country in the world, in the period 20022006. We are therefore able to consider broad differences between the stronger and weaker legal and institutional environments of acquiring and target rms. The period analyzed includes the sixth M&A wave, which started in 2003. We also consider the inuence of the restructuring of the telecom sector after the crash, increased incentives to enter emerging markets, such as China or Eastern Europe and also the inuence on valuation of cross-border M&As by acquiring-rm shareholders of the 2002
Sarbanes-Oxley Act (SOX), which applies stricter rules to list rms in stock markets have been also established in the European countries. Shareholders of acquiring rms place greater value on crossborder M&A announcements than on domestic ones. Cumulative Average Abnormal Return (CAAR), in (1,+1), is 0.99% for the whole sample, 1.38% for cross-border deals and 0.64% for domestic ones. The lower competition in transactions by private rms generates signicant gains for acquiring rms (1.38%). And the differences between the sub-sample of public target rms and private ones are also signicant for the cross-border sub-sample. CAAR for the greater size in the acquiring-rm sub-sample is more positive in domestic (1.17%) than in cross-border deals (0.50%). Also the CAAR for the greater size of acquiring rms is lower than for smaller ones (3.04%) in the cross-border sub-sample, showing that smaller rms have better-aligned interests between shareholders and management. The multivariate analysis shows that the legal and institutional environment is a determinant for valuation of M&As by acquiringrm shareholders. A lower level of stock market capitalization in
185
the target country has a positive effect on the bidder shareholder valuation, in accordance with the greater likelihood of nding undervalued target rms. And, when there are important differences between the acquiring and target countries, the legal and institutional environment has a negative inuence when the target rm belongs to an environment with greater economic freedom or stock market capitalization. A stronger legal and institutional environment in the target country increases the transaction cost for cross-border deals. The usefulness of M&As for transferring better corporate practices from the target to the bidder rms does not seem to work well in this period. This issue coincides with regulatory changes in countries with a strong legal and institutional environment, which may make access to markets for rms from countries with weak legal and institutional environments more difcult. Our ndings contribute to the M&A literature by showing that, on average, cross-border M&As are valued positively by
acquiring-rm shareholders and that, when there are large negative differences between the acquiring and target rms legal and institutional environments, then cross-border M&As destroy value for acquiring rms. The results also contribute to the corporate governance literature by showing how important it is for rms to have more economic freedom in their countries as this facilitates access and competition in international markets. Acknowledgments Financial support from the Spanish Science and Innovation Ministry (MICINN-09-ECO2009-11758) is gratefully acknowledged. Authors also acknowledge the nancial support of the Fundacin para el Fomento en Asturias de la Investigacin Cientca Aplicada y la Tecnologa (FICYT) and the Fundacin Banco Herrero. Appendix A. Variables denition
Variable Method of payment Friendly deals Related business Cash-ow Market-to-book
Denition Dened by the variable Cash payment, which has a value of 1 if nancing is exclusively in cash (Hagendorff et al., 2007; Moeller et al., 2004). We expect a positive sign explaining Cumulative Abnormal Returns (CAR). Source: Thomson One Banker. Indicator that reects acquirers attitude regarding the takeover, and has a value of 1 if friendly (Campa & Hernando, 2004; Goergen & Renneboog, 2004; Moeller et al., 2004). We expect a positive effect of friendly deals. Source: Thomson One Banker. Indicator that has a value of 1 if the main business is the same for both rms (two digits of the SIC code), that is, when the acquisition is focus (Campa & Hernando, 2004; Hagendorff et al., 2007). We expect a positive sign of focus activity on CAR. Source: Thomson One Banker. Dened as cash-ow by total acquiring rm assets (Harford, 1999; Jensen, 1986; Martynova & Renneboog, 2008). Higher cash ow is expected to determine worse acquiring shareholders valuation of M&As announcement (CARs). Source: Thomson One Banker. Dened as the market-to-book ratio of the acquiring rm (Dong et al., 2006; Martynova & Renneboog, 2008; Moeller et al., 2004). A higher market-to-book ratio might have a positive inuence on CARs if proxys for growth opportunities, but a negative one, if reects the overvaluation of acquiring rm shares. Source: Thomson One Banker. Indicator that has a value of 1 if the rm falls within the rst quartile of market capitalization at the end of the semester prior to the transaction announcement (Moeller et al., 2004). We expect that acquiring shareholders value a deal worse when it is announced by a rm with higher size, according to managerial hubris hypothesis. Calculated as the logarithm of the transaction value divided by the market value of the acquiring rm four days before the transaction (Moeller et al., 2004). The effect is not clear a priori, given that, a higher size of the target might reduce the adverse selection problem but also might increase the integration problems. Source: SDC Thomson One Banker. Indicator has a value of 1 if the target rm lists on the stock market (Moeller et al., 2004). We expect a negative inuence on acquiring shareholders valuation of M&A announcement, due to the more competition in the acquisitions of the public rms. Source: Thomson One Banker. Indicator equals 1 if the acquirer acquires the 100% of the target shares after the deal (Martynova & Renneboog, 2008). Source: Thomson One Banker. Cumulative abnormal returns (CARs) of the bidder over the window (60,20) preceding the takeover announcement day (Martynova & Renneboog, 2006, 2008, 2011). This is the percentage of control right held by the last major shareholder at the end of the year prior to the deal (Martynova & Renneboog, 2011). We also dene acquiring ownership squared given that we expect a non-monotonic inuence from acquiring ownership and acquiring shareholder valuation. The variable proxies for the quality of corporate governance in a country, dened following Rossi and Volpin (2004) and Hagendorff et al. (2007) and multiplying the revised anti-director index (Djankov et al., 2008) by a measure of the rule of law, which rates the law-and-order tradition (Kaufmann et al., 2007). We multiply the creditor rights index dened by Djankov et al. (2003), a proxy for the possibility of debt nancing, by the measure of legal efciency (rule of law). This variable is taken from the Heritage Foundation. It is an index to measure the degree of economic freedom within a country, collected for each host country. It is based on 10 specic freedom-related criteria, such as trade policy, taxation, government intervention, foreign investment policy, banking, pricing controls, property rights, and regulation. A lower score proxies for a less developed legal and institutional environment (Francis et al., 2008; Moeller & Schlingemann, 2005). This is a measure of the size of the countrys stock market. It is dened as the market capitalization of a country as a percentage of its gross domestic product one year prior to the acquisition, obtained from the World Development Indicator (World Bank)
Acquirers size
Relative size
Listed target
Acquisition of 100% Runup Acquiring ownership
Shareholder protection
Creditor protection Economic Freedom
Stock market capitalization
186
I. Feito-Ruiz, S. Menndez-Requejo / International Review of Law and Economics 31 (2011) 169187 Goergen, M., & Renneboog, L. (2004). Shareholder wealth effects of European domestic and cross-border takeover bids. European Financial Management, 10, 945. Goergen, M., & Renneboog, L. (2008). Contractual corporate governance. Journal of Corporate Finance, 14, 166182. Gregoriou, G. N., & Renneboog, L. (2007). International mergers and acquisitions since 1990. Recent research and quantitative analysis. Quantitative nance series Elsevier Finance. Gregory, A. (1997). An examination of the long-run performance of UK acquiring rms. Journal of Business Finance & Accounting, 24, 971972. Gregory, A., & McCorriston, S. (2002). Foreign acquisitions by UK limited companies: Long-run performance in the US, Continental Europe and rest of the world. Working Paper, Financial Market Research Centre (University of Exeter). Grossman, S., & Hart, O. (1980). 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International Review of Law and Economics 31 (2011) 169187

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International Review of Law and Economics

Cross-border Mergers and Acquisitions in different legal environments

I. Feito-Ruiz, S. Menndez-Requejo / International Review of Law and Economics 31 (2011) 169187

I. Feito-Ruiz, S. Menndez-Requejo / International Review of Law and Economics 31 (2011) 169187

I. Feito-Ruiz, S. Menndez-Requejo / International Review of Law and Economics 31 (2011) 169187

I. Feito-Ruiz, S. Menndez-Requejo / International Review of Law and Economics 31 (2011) 169187

I. Feito-Ruiz, S. Menndez-Requejo / International Review of Law and Economics 31 (2011) 169187

2 137 22 1 1 1 137 72 209

I. Feito-Ruiz, S. Menndez-Requejo / International Review of Law and Economics 31 (2011) 169187

I. Feito-Ruiz, S. Menndez-Requejo / International Review of Law and Economics 31 (2011) 169187

Difference test (p value)

I. Feito-Ruiz, S. Menndez-Requejo / International Review of Law and Economics 31 (2011) 169187

(7.44) (4.69) (0.38)

(5.38) (4.49) (1.25)

(5.34) (2.25) (0.99)a

I. Feito-Ruiz, S. Menndez-Requejo / International Review of Law and Economics 31 (2011) 169187

Domestic (N = 248) 0.64%*** 0.71%*** 0.55%*** (p = 0.37) 0.71%*** 0.55%*** (p = 0.37)

Cross-border (N = 221) 1.38%*** 0.84%** 1.67%*** (p = 0.72) 0.17% 2.33%*** (p = 0.02** )

Diff. (domest cross-bord.) (p value) (p = 0.41) (p = 0.23) (p = 0.88)

0.99%*** 0.76%*** 1.19%*** (p = 0.54) 0.49%*** 1.51%*** (p = 0.40)

(7.44) (5.12) (5.40)

(5.38) (4.81) (2.80)

(5.34) (2.28) (4.72)

Signicant at the 5% level. Signicant at the 1% level.

1.13*** (4.46) 1.79*** (2.64) (p = 0.84) Creditor protection (N = 120) % t-test

1.22*** (4.32) 1.51*** (2.99) (p = 0.45) Economic freedom (N = 83) % t-test

I. Feito-Ruiz, S. Menndez-Requejo / International Review of Law and Economics 31 (2011) 169187

DFSHAREBT 1.000 0.7847*** 0.6593*** 0.2491***

DFCREDITORBT 1.000 0.5086*** 0.1203*

Signicant at the 10% level. signicant at the 1% level.

I. Feito-Ruiz, S. Menndez-Requejo / International Review of Law and Economics 31 (2011) 169187

I. Feito-Ruiz, S. Menndez-Requejo / International Review of Law and Economics 31 (2011) 169187

I. Feito-Ruiz, S. Menndez-Requejo / International Review of Law and Economics 31 (2011) 169187

I. Feito-Ruiz, S. Menndez-Requejo / International Review of Law and Economics 31 (2011) 169187

Yes Yes 333 0.0487 42.68

I. Feito-Ruiz, S. Menndez-Requejo / International Review of Law and Economics 31 (2011) 169187

0.0501* (1.88) Yes Yes 151 0.0000 68.58 0.0864** (2.04)

Yes Yes 155 0.0487 42.68 0.1102** (2.03)

I. Feito-Ruiz, S. Menndez-Requejo / International Review of Law and Economics 31 (2011) 169187

Variable Method of payment Friendly deals Related business Cash-ow Market-to-book

Acquisition of 100% Runup Acquiring ownership

Creditor protection Economic Freedom

Stock market capitalization

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Domestic (N = 248) 0.64%* 0.71%* 0.55%* (p = 0.37) 0.71%* 0.55%*** (p = 0.37)

Cross-border (N = 221) 1.38%* 0.84% 1.67%* (p = 0.72) 0.17% 2.33%* (p = 0.02** )

0.99%* 0.76%* 1.19%* (p = 0.54) 0.49%* 1.51%*** (p = 0.40)

1.13* (4.46) 1.79* (2.64) (p = 0.84) Creditor protection (N = 120) % t-test

1.22* (4.32) 1.51* (2.99) (p = 0.45) Economic freedom (N = 83) % t-test

DFSHAREBT 1.000 0.7847* 0.6593* 0.2491***