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The effects of linguistic distance and lingua franca proficiency on the stake taken by acquirers in cross-border acquisitions

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Abstract

We study the effects of linguistic distance and lingua franca proficiency on the equity stake taken by acquirers from 67 countries in 59,092 acquisition targets in 69 host countries. We theorize and find that acquirers take lower equity stakes in foreign targets when linguistic distance and differences in lingua franca proficiency between them are high, and take higher stakes when the combined lingua franca proficiency of the parties is high. We also find that linguistic and cultural distance reduce the impact of the combined lingua franca proficiency of the parties on the level of equity taken, which shows that the effective use of a lingua franca is affected by the native tongues and cultures of the parties. Our results clearly demonstrate that governance research and international business studies can benefit from incorporating language into their explanatory models.

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Notes

  1. The other two, Dow and Larimo (2011) and Slangen (2011), look at the choice between greenfield and acquisitions.

  2. We thank an anonymous referee for suggesting this point.

  3. This is the case when managers are owners, or when their compensation (e.g., stock options) gives them incentives that are in line with those of the owners.

  4. Separating the impact of differences in the attributes of the parties from that of their combined attributes is common in dyadic research (e.g., Ahuja, Polidoro, & Mitchell, 2009).

  5. The usual measure of concentration is the Herfindahl index (HHI) which ranges from 0 (perfectly equal distribution) to 1 (a single category accounts for all observations). All HHIs were low: the HHI for acquirer countries was 0.12, that for target countries was 0.07 and that for acquirer country-target country pairs was 0.01.

  6. While Kogut and Singh’s index is one of the most commonly used measures of cultural distance in IB, distance measures like theirs have been criticized for assuming that the effect of distance is symmetric (e.g., Ambos & Håkanson, 2014; Shenkar, 2001). We believe that this simplification is reasonable in our context. Namely, in our particular setting we are theoretically focusing on how cultural distance (as a moderator) affects two-way communication and information exchange between the acquirer and the target ex ante (during the due diligence and negotiation stage) and ex post (during the post-acquisition management stage). In this scenario we do not have a priori reasons for the moderating effect of distance to be asymmetric (i.e., that distance A–B≠distance B–A).

  7. A one standard deviation increase in Linguistic Distance reduces the effect of Combined English Proficiency on equity acquired by 17.5%, and a one standard deviation increase in Cultural Distance reduces the effect of Combined English Proficiency on equity acquired by 7.5%.

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Acknowledgements

The authors would like to thank Youtha Cuypers, Mike Hitt, Elizabeth Rose, Arjen Slangen, Tony Tong, Area Editor David C Thomas, and three anonymous reviewers for their comments. The authors have also benefited from comments by participants at a presentation at Singapore Management University. The third author gratefully acknowledges financial support from the Cariplo Foundation international recruitment call, The Internationalization of Italian Firms: the Role of Intangibles, Managerial Resources, and Corporate Governance. The authors are listed in alphabetical order; they all contributed equally to the manuscript.

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Authors and Affiliations

  1. Lee Kong Chian School of Business, Singapore Management University, Singapore

    Ilya R P Cuypers, Gokhan Ertug & Jean-François Hennart

  2. University of Pavia, Pavia, Italy

    Jean-François Hennart

  3. Queens University Management School, Belfast, UK

    Jean-François Hennart

  4. CentER, Tilburg University, Tilburg, The Netherlands

    Jean-François Hennart

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  1. Ilya R P Cuypers
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  2. Gokhan Ertug
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  3. Jean-François Hennart
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Correspondence to Jean-François Hennart.

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Accepted by David C Thomas, Area Editor, 12 November 2014. This article has been with the authors for two revisions.

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R P Cuypers, I., Ertug, G. & Hennart, JF. The effects of linguistic distance and lingua franca proficiency on the stake taken by acquirers in cross-border acquisitions. J Int Bus Stud 46, 429–442 (2015). https://doi.org/10.1057/jibs.2014.71

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