The Role of Acquisitions in Foreign Direct Investment: Evidence from the U.S. Stock Market

This paper examines foreign direct investment by studying shareholder wealth gains for 1273 U.S. firms acquired during the period 1970-1987. Three findings stand out. First, cross-border takeovers are more frequent in research and development intensive industries than are domestic acquisitions; furthermore, in three-fourths of cross-border transactions the buyer and seller are in related industries. These industry patterns suggest that costs and imperfections in product markets play an important role in foreign direct investment. Second, targets of foreign buyers have significantly higher wealth gains than do targets of U.S. firms. This cross-border effect is comparable in size to the wealth effects of all-cash and multiple bids, two effects receiving substantial attention in the finance literature, and is robust to inclusion of these two variables. Third, while the cross-border effect on wealth gains is not well explained by industry and tax variables, it is positively related to the weakness of the U.S. dollar, indicating a significant role for exchange rate movements in foreign direct investment.     

Testing the fire-sale FDI hypothesis for the European financial crisis

Using a panel of corporate transactions in 27 EU countries from 1999 to 2012, we investigate the impact of the financial crisis on the market for corporate assets. In particular, we test the ‘fire-sale FDI’ hypothesis by analyzing the number of cross-border transactions, the price of corporate assets and the impact of credit and macroeconomic conditions. According to the fire-sale FDI hypothesis, countries affected by a crisis attract foreign buyers selling assets at a discount. We find a dampening effect of the crisis on cross-border transactions in all EU countries. Although countries with higher sovereign default risk and lower economic demand attracted more foreign buyers in the crisis, lower domestic credit is associated with less cross-border transactions. Corporate assets in crisis countries are cheaper, particularly if domestic credit is low; however, these findings are not limited to the crisis period. This pattern is strikingly different from the East Asian and Latin American financial crises. Overall, we find little evidence for ‘fire-sale FDI’ suggesting an integrated European market without significant frictions.     

Asset sales in the mutual fund industry: Who gains?

We analyze gains from intercorporate sales of mutual fund subsidiaries, using mandated SEC disclosures to assess the performance of mutual funds transferred by these transactions. Sellers are financial conglomerates (banks) using equity-based deals to transfer poorly performing funds to highly focused asset management companies. The transferred funds experience significant improvements in risk-adjusted returns, efficiency, and asset growth. These improvements are closely correlated with the gains in wealth to buyers and sellers at deal announcements, indicating the market efficiently capitalizes expected performance improvements. Our results provide evidence that these transactions transfer assets to acquirers better able to manage them, generating gains for fund holders and buyer and seller shareholders.     

Methods of Payment in Asset Sales: Contracting with Equity versus Cash

We analyze intercorporate asset sales where equity is the means of payment, and compare the results to cash asset sales. Equity deals are value‐enhancing for both buyers, 10%, and sellers, 3%, while cash sales generate seller returns of 1.9% and buyer returns that are not significant. Combined wealth gains are large for equity deals, but modest for cash deals. Equity‐based asset sales are not a precursor to consolidations between buyers and sellers, and do not affect buyer openness to the takeover market. We conclude that the use of buyer equity conveys favorable information about the value of assets and buyers.     

Scale Economies in Cross-Border Shopping and Commodity Taxation

A simple inventory theoretic model of cross-border shopping with transaction and storage costs is developed. Consumers incur fixed transaction and transportation costs to access the foreign market in which a perfect substitute of the domestic good is available. We show that the size of the optimal tax is inversely related to the size of domestic transactions. This result provides a simple example of a more general principle, that is, when there are increasing returns to scale in tax avoidance with respect to the quantities involved, then smaller transactions should be taxed more heavily than larger transactions. This revised version was published online in July 2006 with corrections to the Cover Date.     

Is the M&A announcement effect different across Europe? More evidences from continental Europe and the UK

The United Kingdom (UK) and Continental Europe are two of the most dynamic markets for mergers and acquisitions in the world. Using a sample of 2823 European acquisitions announced between 2002 and 2010, we investigate the effect of M&A announcements on stock returns of acquiring companies located in Continental Europe and the UK. The analysis is based on characteristics of takeover transactions such as method of payment, listing status of the target company, geographic scope (cross-border vs. domestic), industry relatedness of the bidding and the target company, amongst other factors. We find that European bidders earn positive abnormal returns both in cross-border and domestic acquisitions, and there is a significant difference between the abnormal returns of stock and cash deals, and between acquisitions of listed and unlisted target companies. However, the cross-border wealth effects are not significantly different between the UK and Continental Europe. We find that bidding firm’s shareholders gain more in equity than in cash offers if they are located in the UK and if they acquire unlisted targets. Cash bids for listed targets are associated with higher abnormal returns for bidders located in Continental Europe. We do not find supportive evidence that industry diversification destroys value for shareholders of both Continental European and the UK bidders.     

Consolidation and value creation in the insurance industry: The role of governance

We examine the long run performance of M&A transactions in the property–liability insurance industry. We specifically investigate whether such transactions create value for the bidders’ shareholders, and assess how corporate governance mechanisms, internal and external, affect such performance. Our results show that M&A create value in the long run as buy and hold abnormal returns are positive and significant after 3 years. While tender offers appear to be more profitable than mergers, our multivariate evidence does not support the conjecture that domestic transactions create more value than cross-border transactions. Furthermore, positive returns are significantly higher for frequent acquirers and in countries where investor protection is weaker. Internal corporate governance mechanisms, such as board independence, and CEO share ownership, are also significant determinants of the long run positive performance of bidders.     

The Relevance of Target Accounting Quality to the Long-Term Success of Cross-Border Mergers

Abstract:  We investigate a sample of cross-border mergers involving US firms that acquired foreign targets between 1985 and 1995. Our general interest is in the long-term success of the acquisitions, measured by the post-merger abnormal returns to the US acquirers. Our primary focus is the relationship between the quality of the foreign target's accounting disclosures and the acquisition's long-term success. Employing a procedure recommended by Lyon et al. (1999) , we find that US acquirers in cross-border mergers experience significantly negative long-term abnormal returns post-merger. These returns also are significantly more negative than those realized by a matched sample of US acquirers that acquired US targets. To investigate the potential association between the US acquirers' post-acquisition returns and target firms' accounting disclosures, we classify the merger transactions by target firm home country. We define variables to reflect the quality of accounting disclosures and control for other important country-specific features. The results reveal that post-merger abnormal returns are less negative for acquirers of targets based in countries where accounting data is less value relevant. This may be due to a higher cost of capital for target firms in these countries, resulting in a built-in discount in the pricing of targets. An examination of the premiums paid in a subset of 79 cross-border mergers reveals evidence consistent with this contention: premiums are lower for target firms based in countries where accounting data is less value relevant. These results suggest that shareholders of targets from such countries pay a price for their country's institutional framework that makes accounting information less value relevant.     

Stock market reaction to COVID-19: Evidence from U.S. Firms’ International exposure

We examine the U.S. stock market reaction to the World Health Organization's announcement declaring COVID-19 a global health emergency, with a focus on firms' international exposure. We find that while international exposure through foreign sales, foreign assets, imports and exports are significant and negatively associated with standardized cumulative abnormal returns in the short-run, the effect reverses in the long-run. In the long-run, internationalization contributes to multinational firms being more resilient to economic shocks caused by COVID-19.     

U.S. Equity Investment in Emerging Stock Markets

This article examines U.S. equity flows to emerging stock marketsfrom 1978 to 1991 and draws three main conclusions. First, despitethe recent increase in U.S. equity investment in emerging stockmarkets, the U.S. portfolio remains strongly biased toward domesticequities. Second, of the fraction of the U.S. portfolio thatis allocated to foreign equity investment, the share investedin emerging stock markets is roughly proportional to the shareof the emerging stock markets in the global market capitalizationvalue. Third, the volatility of U.S. transactions in emerging-marketequities is higher than in other foreign equities. The normalizedvolatility of U.S. transactions appears to be falling over time,however, and we find no relation between the volume of U.S.transactions in foreign equity and local turnover rates or volatilityof stock returns.     

Stockholder returns and international acquisitions of financial firms: An emphasis on banking

The wealth effects for shareholders of American financial firms involved in foreign acquisitions and also the wealth effects for shareholders of U.S. target firms acquired by foreign concerns are the topics of this study. The findings indicate that stockholders of U.S. bidding financial firms (and its subset of banks) earn neither abnormal gains nor suffer abnormal losses upon the announcement of an acquisition or regulatory approval. On the other hand, stockholders of U.S. target financial firms (and its subset of banks) earn significant abnormal profits at both the announcement of the proposed acquisition and the announcement of regulatory approval of the acquisition. The wealth effects for these two samples are also compared to samples in which both parties to the acquisition are U.S. firms. The research suggests that there is no significant difference in the size of the announcement gains or losses for either stockholders of the target or bidding firms based on whether the acquisition is foreign or domestic. These findings conflict with prior research which indicates that, for firms in general, stockholders of U.S. targets earn significantly greater wealth benefits when they are acquired by foreign firms than by domestic firms. Overall, these results are consistent with a competitive market for acquisitions of financial firms in which buyers do not earn or lose at the announcement of an acquisition, and in which abnormal gains are received only by the sellers.     

Multinationals and stock return comovement

We find that when a U.S. domestic firm becomes a multinational (MNC), its returns comove more with those of existing multinational firms and less with those of purely domestic firms in the following year. This result is robust to a propensity score matching method and an exogenous shock. Turnover comovement and changes in mutual funds' holdings of these MNC initiators further indicate that investors prefer multinationals as a style investment. Moreover, MNC initiators with larger foreign sales experience larger shifts in return comovement. Finally, the effect of MNC initiation on return comovement is relatively weaker for 2000–2016 than for 1979–1997.     

Information,sophistication, and foreign versus domestic investors’ performance

Using an intraday transaction dataset with trader identity, we study foreign and domestic investors’ trading activities and investment performance ahead of open-ending events of Taiwanese closed-end funds. Simply buying the funds at a discount and holding until open-ending generates large abnormal returns. All information required to execute this strategy is made public, so the events set up natural experiments to examine how investors trade, holding constant access to information. Foreign investors are net buyers ahead of the open-endings, more than doubling their positions and earning large abnormal returns. Domestic investors are net sellers while the discounts are still large, and forego large abnormal returns. The results suggest that investor sophistication in interpreting the same information is potentially an important determinant of investment performance differences across foreign and domestic investors.     

Analysing the wealth effects of UK divestitures: An examination of domestic and international sales

Here we analyse divestiture announcement effects for UK multinational corporations accounting for the location of the unit sold. We find some bias in market reactions with larger abnormal returns for UK divestitures when compared to overseas sales. US sales generate larger returns than those in Continental Europe or the Asia-Pacific region. We analyse the determinants of abnormal returns using accounting and transaction data, supplemented with country specific data for overseas sales. Abnormal returns for UK sales are explained by financial characteristics of the selling firm but the size of the transaction relative to the firm is the most significant factor in overseas divestitures.     

Insider trading in Hong Kong: Some stylized facts

This paper examines the characteristics and price movements of legal insider transactions in Hong Kong. Abnormal returns are analyzed for intensive trading, as well as for samples grouped by industry classification, firm size, book-to-market ratio, price–earnings ratio, and relative trading volume of the insider transactions. Results show that insiders are able to earn abnormal profits from both buying and selling activities. The magnitude of and duration for abnormal profits depend significantly on firm-specific and transaction-specific factors. We also document the persistence of abnormal returns associated with insider sales, while abnormal profits associated with insider purchases are concentrated in certain transactions.     

The relation between trades of domestic and foreign investors and stock returns in Sri Lanka

This study investigates the relation between equity flows and returns in Sri Lanka using daily trade data categorized by investor classes. The results show that purchases and sales of domestic and foreign investors, both institutional and individual, are positively related with past returns, except during crisis periods, when they are negatively related. Domestic institutional and foreign individual purchases lead to higher future returns whereas domestic individual purchases lead to lower future returns. Foreign institutional purchases do not impact future returns. Sales by domestic investors have no impact on future returns while sales by foreign investors lead to higher future returns.     

Uncovered Equity Parity and rebalancing in international portfolios

Portfolio rebalancing is a key driver of the Uncovered Equity Parity (UEP) condition. According to UEP, when foreign equity holdings outperform domestic holdings, domestic investors are exposed to higher exchange rate exposure and hence repatriate some of the foreign equity to decrease their exchange rate risk. By doing so, foreign currency is sold, leading to foreign currency depreciation. We examine the relationship between U.S. investors' portfolio reallocations and returns and find some evidence consistent with UEP: Portfolio shifts are related to past returns in the underlying equity markets. But we argue that a motive other than reducing currency risk exposure is likely behind this rebalancing. In particular, U.S. investors rebalance away from equity markets that recently performed well and move into equity markets just prior to relatively strong performance, suggesting tactical reallocations to increase returns rather than reduce risk.     

Global diversification and bidder gains: A comparison between cross-border and domestic acquisitions

We provide empirical evidence on how cross-border acquisitions from the perspective of an US acquirer differ from domestic transactions based on stock and operating performance measures. For a sample of 4430 acquisitions between 1985 and 1995 and controlling for various factors we find that US firms who acquire cross-border targets relative to those that acquire domestic targets experience significantly lower announcement stock returns of approximately 1% and significantly lower changes in operating performance. Stock returns are negatively associated with an increase in both global and industrial diversification. Cross-border takeover activity has increased during the past decade and the observed difference in bidder gains is more pronounced for the latter half of the sample period. We find that bidder returns are positively related to takeover activity in the target country and to a legal system offering better shareholder rights. With the exception of the UK, the target country's degree of economic restrictiveness is negatively related to bidder returns.     

What drives cross-segment diversity in returns and risks? Evidence from Japanese and U.S. firms

The usefulness of segment reporting is grounded on the presumption of diversities of returns and risks across reported segments. We examine the effect of country-specific factors, reporting incentives, and choices on an ANOVA-based measure of cross-segment diversities (CSD) in risk and returns for a sample of Japanese and U.S. multi-segment firms. We find that, in contrast to our expectations, Japanese firms exhibit greater CSD than U.S. firms. Moreover, we find that in both countries CSD is driven especially by reporting incentives associated with profitability and foreign sales, but not by proprietary costs. Further, the manager's choice of the number of reported segments is an important factor affecting CSD.     

Why does shareholder protection matter for abnormal returns after reported insider purchases and sales?

We use a unique data set of more than 240,000 reported insider transactions across 15 European countries and the USA to analyze the link between country-level shareholder protection and abnormal returns following insider trades. We show that abnormal returns after insider transactions are positively correlated with country-level shareholder protection against expropriation by corporate insiders, which supports the information-content hypothesis. Market reaction to insider purchases increases with shareholder protection because shareholder protection enhances the transparency and trustworthiness of insiders’ actions, and limits possibilities for direct profit diversion, so that more information is eventually reflected in stock prices. For insider sales, shareholder protection decreases their negative information content. We conjecture that this is due to the effect of greater transparency and trustworthiness strengthening the diversification and liquidity reasons for selling in better shareholder protection countries. We find limited support for the rent-extraction hypothesis that conjectures that shareholder protection is associated with insider trading dollar profits.