Skip to main content

Advertisement

SpringerLink
Log in

Does economic freedom distance affect long-run post-acquisition performance and ownership level in cross-border acquisitions?

  • Research Article
  • Published:
DECISION Aims and scope Submit manuscript

Abstract

Using a large international sample of 35,798 cross-border acquisition (CBA) deals, we find strong evidence that economic freedom distance affects long-run post-acquisition performance and ownership level. We build our arguments using organizational imprinting theory to show that greater economic freedom distance leads to higher post-acquisition performance. However, our findings show that greater ownership level in the target firm adversely affects the imprinting effects in CBA deals. In addition to arbitrage advantages, higher economic freedom distance increases information asymmetry risks for MNEs, prompting them to opt for lower ownership levels. Finally, we demonstrate that ownership decisions of MNEs from emerging economies differ significantly from those that domicile in developed countries.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4

Similar content being viewed by others

Notes

  1. The data of economic freedom is available only after the year 1995.

  2. See Table 1 for the full list of countries represented by this dataset.

  3. ADTD acquisitions is the base model with higher percentage than any other CBA directions in our sample,.

References

  • Ahern KR, Daminelli D, Fracassi C (2015) Lost in translation? The effect of cultural values on mergers around the world. J Financ Econ 117(1):165–189

    Article  Google Scholar 

  • Ambos B, Håkanson L (2014) The concept of distance in international management research. J Int Manag 20(1):1–7

    Article  Google Scholar 

  • Anderson E, Gatignon H (1986) Modes of foreign entry: a transaction cost analysis and propositions. J Int Bus Stud 17(3):1–26

    Article  Google Scholar 

  • Anokhin S, Wincent J (2012) Start-up rates and innovation: a cross-country examination. J Int Bus Stud 43(1):41–60

    Article  Google Scholar 

  • Aybar B, Ficici A (2009) Cross-border acquisitions and firm value: an analysis of emerging-market multinationals. J Int Bus Stud 40(8):1317–1338

    Article  Google Scholar 

  • Berggren N (2003) The benefits of economic freedom: a survey. Indep Rev 8(2):193–211

    Google Scholar 

  • Berry H, Guillén MF, Zhou N (2010) An institutional approach to cross-national distance. J Int Bus Stud 41(9):1460–1480

    Article  Google Scholar 

  • Bradley M, Desai A, Kim EH (1988) Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms. J Financ Econ 21(1):3–40

    Article  Google Scholar 

  • Brouthers KD, Hennart JF (2007) Boundaries of the firm: insights from international entry mode research. J Manag 33(3):395–425

    Google Scholar 

  • Campos NF, Giovannoni F (2007) Lobbying, corruption and political influence. Public Choice 131(1–2):1–21

    Article  Google Scholar 

  • Chacar A, Vissa B (2005) Are emerging economies less efficient? Performance persistence and the impact of business group affiliation. Strateg Manag J 26(10):933–946

    Article  Google Scholar 

  • Chari MD, Chang K (2009) Determinants of the share of equity sought in cross-border acquisitions. J Int Bus Stud 40(8):1277–1297

    Article  Google Scholar 

  • Chari A, Ouimet PP, Tesar LL (2009) The value of control in emerging markets. Rev Financ Stud 23(4):1741–1770

    Article  Google Scholar 

  • Chen SFS, Hennart JF (2004) A hostage theory of joint ventures: why do Japanese investors choose partial over full acquisitions to enter the United States? J Bus Res 57(10):1126–1134

    Article  Google Scholar 

  • Chikhouni A, Edwards G, Farashahi M (2017) Psychic distance and ownership in acquisitions: direction matters. J Int Manag 23(1):32–42

    Article  Google Scholar 

  • Child J, Rodrigues SB (2005) The internationalization of chinese firms: a case for theoretical extension? Manag Organ Rev 1(3):381–410

    Article  Google Scholar 

  • Child J, Tsai T (2005) The dynamic between firms’ environmental strategies and institutional constraints in emerging economies: evidence from China and Taiwan. J Manage Stud 42(1):95–125

    Article  Google Scholar 

  • Contractor FJ, Lahiri S, Elango B, Kundu SK (2014) Institutional, cultural and industry related determinants of ownership choices in emerging market FDI acquisitions. Int Bus Rev 23(5):931–941

    Article  Google Scholar 

  • Contractor F, Yang Y, Gaur AS (2016) Firm-specific intangible assets and subsidiary profitability: the moderating role of distance, ownership strategy and subsidiary experience. J World Bus 51(6):950–964

    Article  Google Scholar 

  • Cuervo-Cazurra A, Genc M (2008) Transforming disadvantages into advantages: developing-country MNEs in the least developed countries. J Int Bus Stud 39(6):957–979

    Article  Google Scholar 

  • Cuypers IR, Ertug G, Hennart JF (2015) The effects of linguistic distance and lingua franca proficiency on the stake taken by acquirers in cross-border acquisitions. J Int Bus Stud 46(4):429–442

    Article  Google Scholar 

  • Dang M, Henry D, Yin X, Vo TA (2018) Target corporate governance, acquirers’ location choices, and partial acquisitions. Pac Basin Finance J 50:82–104

    Article  Google Scholar 

  • Di Giovanni J (2005) What drives capital flows? The case of cross-border M&A activity and financial deepening. J Int Econ 65(1):127–149

    Article  Google Scholar 

  • Dikova D (2009) Performance of foreign subsidiaries: does psychic distance matter? Int Bus Rev 18(1):38–49

    Article  Google Scholar 

  • Doh JP, Teegen H, Mudambi R (2004) Balancing private and state ownership in emerging markets’ telecommunications infrastructure: country, industry, and firm influences. J Int Bus Stud 35(3):233–250

    Article  Google Scholar 

  • Doukas J, Travlos NG (1988) The effect of corporate multinationalism on shareholders’ wealth: evidence from international acquisitions. J Finance 43(5):1161–1175

    Article  Google Scholar 

  • Dow D, Cuypers IR, Ertug G (2016) The effects of within-country linguistic and religious diversity on foreign acquisitions. J Int Bus Stud 47(3):319–346

    Article  Google Scholar 

  • Ellis JA, Moeller SB, Schlingemann FP, Stulz RM (2017) Portable country governance and cross-border acquisitions. J Int Bus Stud 48(2):148–173

    Article  Google Scholar 

  • Errunza VR, Senbet LW (1981) The effects of international operations on the market value of the firm: theory and evidence. J Finance 36(2):401–417

    Article  Google Scholar 

  • Estrin S, Ionascu D, Meyer KE (2007) Formal and informal administrative distance, and international entry strategies (No. 728). William Davidson working paper

  • Faccio M, Lang LH (2002) The ultimate ownership of Western European corporations. J Financ Econ 65(3):365–395

    Article  Google Scholar 

  • Gao GY, Murray JY, Kotabe M, Lu J (2010) A “strategy tripod” perspective on export behaviors: evidence from domestic and foreign firms based in an emerging economy. J Int Bus Stud 41(3):377–396

    Article  Google Scholar 

  • Gaur AS, Lu JW (2007) Ownership strategies and survival of foreign subsidiaries: impacts of institutional distance and experience. J Manag 33(1):84–110

    Google Scholar 

  • Gomes-Casseres B (1990) Firm ownership preferences and host government restrictions: an integrated approach. J Int Bus Stud 21(1):1–22

    Article  Google Scholar 

  • Gordon RH, Bovenberg AL (1996) Why is capital so immobile internationally? Possible explanations and implications for capital income taxation. Am Econ Rev 86(5):1057–1075

    Google Scholar 

  • Gwartney JD, Holcombe RG, Lawson RA (2004) Economic freedom, institutional quality, and cross-country differences in income and growth. Cato J 24:205

    Google Scholar 

  • Healy PM, Palepu KG, Ruback RS (1992) Does corporate performance improve after mergers? J Financ Econ 31(2):135–175

    Article  Google Scholar 

  • Hernández V, Nieto MJ (2015) The effect of the magnitude and direction of institutional distance on the choice of international entry modes. J World Bus 50(1):122–132

    Article  Google Scholar 

  • Hofstede G, Minkov M, Hofstede GJ (2010) Cultures and organizations: software of the mind. McGraw-Hill Education, London

    Google Scholar 

  • Huang Z, Zhu H, Brass DJ (2017) Cross-border acquisitions and the asymmetric effect of power distance value difference on long-term post-acquisition performance. Strateg Manag J 38(4):972–991

    Article  Google Scholar 

  • Jackson G, Deeg R (2008) Comparing capitalisms: understanding institutional diversity and its implications for international business. J Int Bus Stud 39(4):540–561

    Article  Google Scholar 

  • Kang JK, Kim JM (2008) The geography of block acquisitions. J Finance 63(6):2817–2858

    Article  Google Scholar 

  • Kogut B, Singh H (1988) The effect of national culture on the choice of entry mode. J Int Bus Stud 19(3):411–432

    Article  Google Scholar 

  • Konara P, Shirodkar V (2018) Regulatory institutional distance and MNCs’ subsidiary performance: climbing up Vs. climbing down the institutional ladder. J Int Manag. https://doi.org/10.1016/j.intman.2018.04.004

    Article  Google Scholar 

  • Kostova T (1999) Transnational transfer of strategic organizational practices: a contextual perspective. Acad Manag Rev 24(2):308–324

    Article  Google Scholar 

  • Kriauciunas A, Kale P (2006) The impact of socialist imprinting and search on resource change: a study of firms in Lithuania. Strateg Manag J 27(7):659–679

    Article  Google Scholar 

  • La Porta R, Lopez-de-Silanes F, Shleifer A, Vishny R (1999) The quality of government. J Law Econ Organ 15(1):222–279

    Article  Google Scholar 

  • Luo Y, Peng MW (1999) Learning to compete in a transition economy: experience, environment, and performance. J Int Bus Stud 30(2):269–295

    Article  Google Scholar 

  • Luo Y, Rui H (2009) An ambidexterity perspective toward multinational enterprises from emerging economies. Acad Manag Perspect 23(4):49–70

    Article  Google Scholar 

  • Luo Y, Tung RL (2007) International expansion of emerging market enterprises: a springboard perspective. J Int Bus Stud 38(4):481–498

    Article  Google Scholar 

  • Makino S, Delios A (1996) Local knowledge transfer and performance: implications for alliance formation in Asia. J Int Bus Stud 27(5):905–927

    Article  Google Scholar 

  • Malhotra S, Gaur AS (2014) Spatial geography and control in foreign acquisitions. J Int Bus Stud 45(2):191–210

    Article  Google Scholar 

  • Malhotra S, Sivakumar K, Zhu P (2011) Curvilinear relationship between cultural distance and equity participation: an empirical analysis of cross-border acquisitions. J Int Manag 17(4):316–332

    Article  Google Scholar 

  • Mallon MR, Fainshmidt S (2017) Assets of foreignness: a theoretical integration and agenda for future research. J Int Manag 23(1):43–55

    Article  Google Scholar 

  • Meyer KE, Estrin S, Bhaumik SK, Peng MW (2009) Institutions, resources, and entry strategies in emerging economies. Strateg Manag J 30(1):61–80

    Article  Google Scholar 

  • Peng MW, Wang DY, Jiang Y (2008) An institution-based view of international business strategy: a focus on emerging economies. J Int Bus Stud 39(5):920–936

    Article  Google Scholar 

  • Prasadh RS, Thenmozhi M (2019) Does religion affect cross-border acquisitions? Tales from developed and emerging economies. Finance Res Lett. https://doi.org/10.1016/j.frl.2018.11.022

    Article  Google Scholar 

  • Ragozzino R, Reuer JJ (2011) Geographic distance and corporate acquisitions: signals from IPO firms. Strateg Manag J 32(8):876–894

    Article  Google Scholar 

  • Reuer JJ, Koza MP (2000) Asymmetric information and joint venture performance: theory and evidence for domestic and international joint ventures. Strateg Manag J 21(1):81–88

    Article  Google Scholar 

  • Reuer JJ, Shenkar O, Ragozzino R (2004) Mitigating risk in international mergers and acquisitions: the role of contingent payouts. J Int Bus Stud 35(1):19–32

    Article  Google Scholar 

  • Reuer JJ, Tong TW, Wu CW (2012) A signaling theory of acquisition premiums: evidence from IPO targets. Acad Manag J 55(3):667–683

    Article  Google Scholar 

  • Seth A, Song KP, Pettit RR (2002) Value creation and destruction in cross-border acquisitions: an empirical analysis of foreign acquisitions of US firms. Strateg Manag J 23(10):921–940

    Article  Google Scholar 

  • Shleifer A, Vishny RW (2003) Stock market driven acquisitions. J Financ Econ 70(3):295–311

    Article  Google Scholar 

  • Stinchcombe AL (1965) Organizations and social structure. Handb Organ 44(2):142–193

    Google Scholar 

  • Surdu I, Mellahi K (2016) Theoretical foundations of equity based foreign market entry decisions: a review of the literature and recommendations for future research. Int Bus Rev 25(5):1169–1184

    Article  Google Scholar 

  • Thenmozhi M, Narayan PC (2016) Rule of law or country level corporate governance: what matters more in emerging market acquisitions? Res Int Bus Finance 37:448–463

    Article  Google Scholar 

  • Thomas DE, Eden L, Hitt MA, Miller SR (2007) Experience of emerging market firms: the role of cognitive bias in developed market entry and survival. Manag Int Rev 47(6):845–867

    Article  Google Scholar 

  • Weitzel U, Berns S (2006) Cross-border takeovers, corruption, and related aspects of governance. J Int Bus Stud 37(6):786–806

    Article  Google Scholar 

  • Williamson OE (1991) Comparative economic organization: the analysis of discrete structural alternatives. Adm Sci Q 36(2):269–296

    Article  Google Scholar 

  • Wright M, Filatotchev I, Hoskisson RE, Peng MW (2005) Strategy research in emerging economies: challenging the conventional wisdom. J Manage Stud 42(1):1–33

    Article  Google Scholar 

  • Xie E, Reddy KS, Liang J (2017) Country-specific determinants of cross-border mergers and acquisitions: a comprehensive review and future research directions. J World Bus 52(2):127–183

    Article  Google Scholar 

  • Xu D, Shenkar O (2002) Institutional distance and the multinational enterprise. Acad Manag Rev 27(4):608–618

    Google Scholar 

  • Yang M (2015) Ownership participation of cross-border mergers and acquisitions by emerging market firms: antecedents and performance. Manag Decis 53(1):221–246

    Article  Google Scholar 

  • Zhang J, He X, van Gorp DM (2017) Economic freedom and cross-border acquisitions from emerging markets into developed economies. Thunderbird Int Bus Rev 59(3):313–331

    Article  Google Scholar 

  • Zhao H, Luo Y, Suh T (2004) Transaction cost determinants and ownership-based entry mode choice: a meta-analytical review. J Int Bus Stud 35(6):524–544

    Article  Google Scholar 

  • Zhao H, Ma J, Yang J (2017) 30 years of research on entry mode and performance relationship: a meta-analytical review. Manag Int Rev 57(5):653–682

    Article  Google Scholar 

Download references

Acknowledgements

We thank Jonathan A. Batten, Nikhil Varaiya, Chinmoy Ghosh, Yakov Amihud and the participants in 1st Annual Conference of the Brunel Studies in Economics and Finance Conference for their insightful comments.

Author information

Authors and Affiliations

  1. Department of Management Studies, Indian Institute of Technology Madras, Chennai, TN, India

    Shyaam Prasadh & M. Thenmozhi

  2. National Institute of Securities Markets, Raigad, MH, India

    M. Thenmozhi

  3. Department: Economics, Finance and Marketing, RMIT University, Melbourne, Australia

    May Hu

Authors
  1. Shyaam Prasadh
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. M. Thenmozhi
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. May Hu
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Shyaam Prasadh.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendix

Appendix

Variables

Definition

Economic freedom distanceij

Economic Freedom distanceij is the difference in acquirer (i) and target (j) country’s quality of economic freedom. Source: Heritage Foundation

Cultural integration

 

Same legal origin

‘1’ if both acquirer and target country have common legal origin, ‘0’ otherwise. We source legal origin between countries from La Porta et al. (1999)

Same primary language

‘1’ if both acquirer and target country have primary spoken language, ‘0’ otherwise. We source primary language between countries from CIA fact book

Same religion

‘1’ if both acquirer and target country have primary religion,‘0’ otherwise. We source primary religion between countries from CIA fact book

Cultural distanceij

Difference in the restraint distance index of acquirer country and target country in the year ‘t’ of acquisition. We source this score from geert-hofstede.com

Economic performance

Source: World bank

Acquirer country GDP

Gross-domestic product of acquirer country in the year ‘t’ of acquisition

Target country GDP

Gross-domestic product of target country in the year ‘t’ of acquisition

Acquirer country _GDP per capita

Gross-domestic product per capita of acquirer country in the year ‘t’ of acquisition

Target country_ GDP per capita

Gross-domestic product of target country in the year ‘t’ of acquisition

Market integration

Source: World bank.& UNCTAD

Acquirer international trade

Sum of imports and exports scaled by GDP of acquirer country in the year ‘t’ of acquisition

Target international trade

Sum of imports and exports scaled by GDP of target country in the year ‘t’ of acquisition

Bilateral treatyij

‘1’ if the acquirer and target nation signed a bilateral investment treaty

Financial development

Source: World bank

Acquirer market cap/GDP

Market capitalization of acquirer country scaled by GDP in the year ‘t’ of acquisition

Target market cap/GDP

Market capitalization of target country scaled by GDP in the year ‘t’ of acquisition

Spatial characteristics

 

Ln(Geographic distanceij)

Log- distances between capital/important cities of acquirer and target country. We source this from CEPII

Deal characteristics

Source: SDC platinum(Thomson Reuters) and Datastream (Thomson Reuters)

Related acquisitions

‘1’ if the acquirer and target firm share at least 1 digit of their SIC code or else ‘0’

Foot hold

‘1’ if acquirer holds up to 25% of the target at the time of announcement or else ‘0’

Prior CBA experience

‘1’ if the acquirer took over another target in the host country prior to acquisition announcement or else ‘0’

Mode of payment

‘1’ if the acquisition is a cash deal or else ‘0’

Tender offer

‘1’ if the acquisition is consummated via tender offer or else ‘0’

Privatization deal

‘1’ if the seller or ultimate parent of the seller is Government

Ownership level

Equity stake owned by an acquirer in a target after the acquisition

Acquirer debt to equity ratio

Total debts divided by total equity of acquirer firm in the year ‘t’ of acquisition

Operating—performance

 

Long-run post-acquisition performance

EBITDA scaled by BVA in t + 3 serves as the proxy for acquirer’s operating performance. t is the year of acquisition

Firm characteristics

 

Target public status

‘1’ if the target firm is a public or else ‘0’

Acquirer public status

‘1’ if the acquirer firm is a public or else ‘0’

Acquirer strategic changes

‘1’ if more than one CBA made by an acquirer during the three years or else ‘0’

Acquirer diversification

‘1’ if the acquirer has more than one business or else ‘0’

Log (Total assets)

Total assets of acquirer firm in the year ‘t’ of acquisition

Acquirer prior performance

EBITDA scaled by BVA in t − 1 is the proxy for acquirer prior performance. t is the year of acquisition

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Prasadh, S., Thenmozhi, M. & Hu, M. Does economic freedom distance affect long-run post-acquisition performance and ownership level in cross-border acquisitions?. Decision 47, 191–213 (2020). https://doi.org/10.1007/s40622-020-00246-6

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s40622-020-00246-6

Keywords

Search

Navigation