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Portable country governance and cross-border acquisitions

Abstract

The agency theory and law and finance literatures show good country governance encourages financial development, mitigates agency problems, and increases firm value. Drawing on these literatures, we develop a theory that benefits from good country governance are portable by firms across countries through cross-border acquisitions. Using acquisitions from 56 countries from 1990 to 2007, we find that acquirers can transport the benefits from good country governance, so that they gain more from acquiring targets with worse country governance than their own. As predicted, the acquirer’s stock-price reaction to acquisitions increases with the country governance distance between the acquirer and the target.

概要

代理理论和法律与金融文献表明,良好国家治理促进金融发展,缓解代理问题,提高公司价值。借鉴这些文献,我们提出一个理论: 良好国家治理的好处能够通过跨国收购企业便携。用来自56个国家1990年至2007年的收购,我们发现,收购方可以传输良好国家治理的好处,让他们从国家治理比自己差的收购目标中获得更多。正如预测的那样,收购方的股价对收购的反应随着收购方与目标之间的国家治理距离而提高。

Résumé

La littérature sur la théorie de l’agence et sur le droit et la finance montre que la bonne gouvernance au niveau d’un pays favorise le développement financier, atténue les problèmes d’agence et augmente la valeur de l’entreprise. S’appuyant sur cette littérature, nous développons une théorie selon laquelle les avantages de la bonne gouvernance au niveau d’un pays sont transposables par les entreprises à d’autres pays grâce à des acquisitions transfrontalières. Analysant des acquisitions de 1990 à 2007 dans 56 pays, nous constatons que les acquéreurs peuvent transposer les avantages d’une bonne gouvernance dans un pays afin qu’ils puissent davantage gagner des cibles à acquérir qui ont une gouvernance pays plus mauvaise que la leur. Comme prévu, la réaction du cours boursier des actions de l’acquéreur augmente avec la différence de gouvernance entre le pays de l’acquéreur et celui de la cible.

Resumo

As teorias da Agência, do Direito e de Finanças mostram que uma boa governança no país incentiva o desenvolvimento financeiro, atenua problemas de agência, e aumenta o valor da empresa. Com base nessa literatura, desenvolvemos uma teoria que afirma que benefícios oriundos de boa governança do país são portáveis por empresas entre países por meio de aquisições transfronteiriças. Usando aquisições de 56 países no período de 1990 a 2007, descobrimos que os adquirentes podem transferir os benefícios da boa governação do país, de modo que eles ganham mais ao adquirir alvos em países cuja governança seja pior do que a do seu próprio país. Como previsto, a reação do preço da ação do adquirente a aquisições aumenta com a distância entre a governança do país adquirente e adquirido.

Resumen

Las literaturas de teoría de la agencia y el derecho y finanzas muestran como una buena gobernabilidad del país incentiva al desarrollo financiero, mitiga los problemas de agencia, y aumenta el valor de la empresa. Con base en estas literaturas, desarrollamos una teoría que se beneficie de una buena gobernabilidad del país son portátiles por las empresas entre los países mediante adquisiciones internacionales. Usando adquisiciones de 56 países desde 1990 hasta 2007, encontramos que los adquirientes pueden transportar los beneficios de buena gobernabilidad, de tal manera que ganen más de la adquisición de las metas con peor gobernabilidad en el país que en el suyo propio. Como se predijo, la reacción del precio de la acción del adquiriente en adquisiciones aumenta con la distancia de la gobernabilidad del país entre el adquiriente y el objetivo.

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ACKNOWLEDGMENTS

The authors gratefully acknowledge funding for this project from the International Business Center at the University of Pittsburgh. We thank Igor Filatotchev, Doug Cumming, April Knill, and David Reeb (the Editors), a Guest Editor, two anonymous referees, and Jess Cornaggia, Isil Erel, Ronald Masulis, Mike Wright (discussant) and participants at the 2012 ASSA Meetings in Chicago, the IFABS 2015 Conference at Oxford University, the 2016 Journal of International Business Studies Paper Development Conference on the Role of Financial and Legal Institutions in International Corporate Governance at the Cass Business School of the City University of London, and seminar participants at Georgetown University, the Erasmus University, the University of Leuven, and the University of Warwick for helpful comments, and Rose Lau for excellent research assistance.

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Correspondence to René M Stulz.

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Supplementary information accompanies this article on the Journal of International Business Studies website (www.palgrave.com/journals)

Accepted by Igor Filatotchev, Guest Editor, on 28 July 2016. This article has been with the authors for three revisions.

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Appendix

Appendix

See Table A1.

Table A1 Governance variable definitions and sources

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Ellis, J.A., Moeller, S.B., Schlingemann, F.P. et al. Portable country governance and cross-border acquisitions. J Int Bus Stud 48, 148–173 (2017). https://doi.org/10.1057/s41267-016-0029-9

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Keywords

  • portability theory
  • agency theory
  • theory on law and finance
  • event study methodology
  • cross-border acquisitions
  • country governance
  • bidder returns