Investor protection and cross-border acquisitions by Chinese listed firms
Investor protection and cross-border acquisitions by Chinese listed firms
Thursday, 17 March 2016: 5:00 PM
Despite the fast-growing trend of firms from emerging economies making acquisitions abroad in recent years, both theoretical explanations and empirical evidence of the determinants of success of those cross-border acquisitions (CBAs) still remain limited (Chen and Young, 2010; Zhang et al., 2011). Based on agency theory, this study examines whether-and if so, how-market value for the acquirers from emerging markets is influenced by changes in investor protection induced by acquisitions, in interaction with institutional shareholders acting as one of the key internal governance mechanisms.
We empirically test our theoretical claims by presenting a quantitative analysis using data containing 153 completed CBAs undertaken by Chinese listed firms between January 2002 and December 2012. Our results indicate that Chinese companies gain higher abnormal returns at the announcement of bids through acquisitions of targets domiciled in countries with superior investor protection to China than those acquisitions of targets based in countries with inferior investor protection to China. We also find that this relationship between investor protection and acquirer returns is moderated by the presence of institutional shareholders acting as an internal corporate governance mechanism through their ownership in acquiring firms. Further, the active governance role of institutional shareholders seems to be more prominent in nonstate-owned Chinese acquirers.
This study adds to the literature with both theoretical and practical implications. First, most of the current literatures are focused on external corporate governance regulations provided by the legal systems of the target domiciled country(Rossi and Volpin, 2004; Bris et al., 2008; Bris and Cabolis, 2008; Martynova and Renneboog, 2008; Chen and Young, 2010; Erel et al., 2012). Our study extends this research perspective in interaction with institutional shareholders who often act as a critical internal governance mechanism through their ownership in acquiring firms. This theoretical framework provides a new analytical train of thought for future studies.
Second, practically, our results will better inform and enhance governance and internationalization strategies of Chinese firms that are expected to undertake CBAs activities in areas such as cooperation with institutional shareholders, the choice of target domiciled location, and the reform of ownership structure. In addition, China and other emerging countries have gone through a fundamental transition toward market-based economies from central planning systems (Cheung et al., 2008). China’s experience may therefore provide valuable lessons and insights on the way companies from other emerging economies incorporate CBAs activities in their internationalization strategies.
We empirically test our theoretical claims by presenting a quantitative analysis using data containing 153 completed CBAs undertaken by Chinese listed firms between January 2002 and December 2012. Our results indicate that Chinese companies gain higher abnormal returns at the announcement of bids through acquisitions of targets domiciled in countries with superior investor protection to China than those acquisitions of targets based in countries with inferior investor protection to China. We also find that this relationship between investor protection and acquirer returns is moderated by the presence of institutional shareholders acting as an internal corporate governance mechanism through their ownership in acquiring firms. Further, the active governance role of institutional shareholders seems to be more prominent in nonstate-owned Chinese acquirers.
This study adds to the literature with both theoretical and practical implications. First, most of the current literatures are focused on external corporate governance regulations provided by the legal systems of the target domiciled country(Rossi and Volpin, 2004; Bris et al., 2008; Bris and Cabolis, 2008; Martynova and Renneboog, 2008; Chen and Young, 2010; Erel et al., 2012). Our study extends this research perspective in interaction with institutional shareholders who often act as a critical internal governance mechanism through their ownership in acquiring firms. This theoretical framework provides a new analytical train of thought for future studies.
Second, practically, our results will better inform and enhance governance and internationalization strategies of Chinese firms that are expected to undertake CBAs activities in areas such as cooperation with institutional shareholders, the choice of target domiciled location, and the reform of ownership structure. In addition, China and other emerging countries have gone through a fundamental transition toward market-based economies from central planning systems (Cheung et al., 2008). China’s experience may therefore provide valuable lessons and insights on the way companies from other emerging economies incorporate CBAs activities in their internationalization strategies.