ACCOUNTING DISCLOSURE QUALITY AND SYNERGY GAINS: EVIDENCE
FROM CROSS-BORDER MERGERS AND ACQUISITIONS
by
LISA ANN EILER
A DISSERTATION
Presented to the Department of Accounting
and the Graduate School of the University of Oregon
in partial fulfillment of the requirements
for the degree of
Doctor of Philosophy
June 2009
11
University of Oregon Graduate School
Confirmation of Approval and Acceptance of Dissertation prepared by:
Lisa Eiler
Title:
"Accounting Disclosure Quality and Synergy Gains: Evidence from Cross-Border Mergers and
Acquisitions"
This dissertation has been accepted and approved in partial fulfillment of the requirements for
the degree in the Department of Accounting by:
David Guenther, Chairperson, Accounting
Steven Matsunaga, Member, Accounting
Linda Krull, Member, Accounting
Bruce Blonigen, Outside Member, Economics
and Richard Linton, Vice President for Research and Graduate Studies/Dean of the Graduate
School for the University of Oregon.
June 13,2009
Original approval signatures are on file with the Graduate School and the University of Oregon
Libraries.
© 2009 Lisa Ann Eiler
III
in the Department of Accounting
Lisa Ann Eiler
An Abstract of the Dissertation of
for the degree of
to be taken
iv
Doctor of Philosophy
June 2009
Title: ACCOUNTING DISCLOSURE QUALITY AND SYNERGY GAINS:
EVIDENCE FROM CROSS-BORDER MERGERS AND ACQUISITIONS
Approved:
David A. Guenther
In this dissertation, I investigate how cross-country differences in regulatory
environments affect the value and distribution of gains in cross-border acquisitions. I
focus on how pre-acquisition strategies to reduce the valuation discount arising from
weak regulatory environments affect the value and distribution of gains between
acquiring and target firms. The two specific strategies I examine are cross-listing and
voluntarily adopting International Financial Reporting Standards (IFRS). I compare the
value and distribution of synergy gains for target firms from weak regulatory
environments that have cross-listed or adopted IFRS (i.e., "strategic firms") to (1) target
firms in similar countries that have not done so (i.e., "non-strategic firms") and (2) target
firms in strong regulatory environment countries.
For the first group, I expect lower total synergy gains and merger premia in
acquisitions involving strategic target firms. However, I expect higher total valuation
gains (i.e., the merger premium plus the increase in value from the strategy) for strategic
firms. For the second comparison group, I expect higher total synergy gains and merger
premia in acquisitions involving strategic firms relative to firms from strong regulatory
environments.
I test my predictions on a sample of cross-border acquisitions completed in 26
countries between 1995-2007. In acquisitions involving target firms from weak
regulatory environments, I find no evidence that either the total synergy gain or merger
premium are smaller for strategic firms. In fact, I find some evidence that the total
synergy gains are higher for strategic firms relative to non-strategic firms. I find some
evidence of higher total valuation gains for cross-listed firms, consistent with my
hypothesis. For the second comparison group, I find no evidence that either the total
synergy gain or merger premium are higher for strategic firms.
By examining cross-border acquisitions, my research provides evidence on an
increasingly important and economically significant type of foreign direct investment. I
relate literature investigating the determinants and distribution of merger synergies to
literature analyzing methods to eliminate cross-country valuation discounts. Therefore,
my research makes an important contribution by providing insights beyond identifying
which party captures synergy gains in cross-border acquisitions.
v
VI
CURRICULUM VITAE
NAME OF AUTHOR: Lisa Ann Eiler
GRADUATE AND UNDERGRADUATE SCHOOLS ATTENDED:
University of Oregon
Eugene, Oregon
The College of St. Catherine
St. Paul, Minnesota
DEGREES AWARDED:
Doctor of Philosophy in Accounting, 2009, University of Oregon
Master of Accounting, 2004, University of Oregon
Bachelor of Science, 1999, The College of St. Catherine
AREAS OF SPECIAL INTEREST:
Cross-Border Mergers and Acquisitions
Taxation
PROFESSIONAL EXPERIENCE:
Research Assistant, Department of Accounting, University of Oregon, 2004-2009
Instructor, Department of Accounting, University of Oregon, 2004-2009
Senior Tax Accountant, MTS Systems Incorporated, 2002
Senior Tax Accountant, Arthur Andersen, LLP, 1999-2002
GRANTS, AWARDS AND HONORS:
Securities Analysis Center Summer Research Grant, May 2007 & 2008
Doctoral Student Award, May 2006
Lundquist College of Business Summer Research Award, May 2006
PUBLICATIONS:
Bryant-Kutcher, L., L. Eiler, and D.A. Guenther. 2009. Taxes and Investment
Opportunities: Valuing Permanently Reinvested Foreign Earnings.
National Tax Journal 61 (4): 699-720.
Vll
Vlll
ACKNOWLEDGMENTS
I am thankful for the valuable guidance and support of my dissertation committee:
Bruce Blonigen, David A. Guenther (chair), Linda Krull, and Steve Matsunaga. This paper
has also benefited from helpful comments and discussions with Chen Lung Chin, Ron
Davies, Mark Jackson, Kevin Rich, Isho Tama-Sweet, participants of the
Trade/Microeconomics discussion group at the University of Oregon, and workshop
participants at the University of Oregon. I gratefully acknowledge financial support from
the Securities Analysis Center at the Lundquist College of Business. All errors or
omIssIOns are my own.
IX
TABLE OF CONTENTS
Chapter Page
I. INTRODUCTION 1
II. LITERATlTRE REVIEW 8
Cross-Border Environment................................................................................ 8
Synergy Gains 13
III. HYPOTHESIS DEVELOPMENT 19
Within Country Comparison......... 19
Cross-listing................................................................................................ 19
Adopting IFRS 23
Cross-Country Comparison.......................... 27
Cross-listing 28
Adopting IFRS 28
IV. RESEARCH DESIGN 30
Measuring the Conglomerate Gain 33
Measuring the Merger Premium 34
Measuring the Total Synergy Gain 34
Measuring the Strategy Premium and the Total Valuation Gains........................ 35
Within Country Comparison: Research Design for Tests ofH1a-H2b................ 38
Cross-Country Comparison: Research Design for Tests of Hypotheses 3 and 4.. 41
Chapter Page
V. RESULTS 43
Descriptive Statistics and Regression Results................. 43
VI. SENSITIVITY ANALSYES 63
Cross-Border Acquisition Experience................................................................ 63
Relative Differences in Regulatory Environments........................ 66
VII. CONCLUSIONS AND FUTURE RESEARCH 75
APPENDIX: CLASSIFICATION OF STRATEGIC FIRMS................................... 77
Cross-Listing..................................................................................................... 77
Adopting IFRS 78
REFERE1\JCES 80
x
Xl
LIST OF FIGURES
Figure Page
1. Within Country Comparison....................................... 27
2. Cross-Country Comparison 29
Xli
LIST OF TABLES
Table Page
1. Summary of Hypotheses................................................. 29
2. Variable Definitions 31
3. Cross-Border Mergers and Acquisitions Activity........... 45
4. Correlation Matrix............................................................................................. 47
5. Observations with Available Data by Sample 50
6. Summary Statistics 53
7. Within Country Comparison.............................................................................. 59
8. Cross-Country Comparison 61
9. Sensitivity to Acquisition Experience: Within Country...................................... 64
10. Sensitivity to Acquisition Experience: Cross-Country 66
11. Sensitivity to Differences in Shareholder Protection: Within Country................ 70
12. Sensitivity to Differences in Shareholder Protection: Cross-Country.................. 73
A1.Classification of Strategic Firms....................................... 79
1CHAPTER I
INTRODUCTION
In this dissertation, I examine how cross-country differences in regulatory
environments affect the value and distribution of gains arising from cross-border mergers
and acquisitions. l Rossi and Volpin (2004) find that merger premia (i.e., the increase in
value of the target firm at the merger announcement) are lower in target countries with
weaker regulatory environments. This suggests that the weak regulatory environment
increases the information risk to the acquirer leading the acquirer to reduce the premium
paid to the target shareholders. However, this explanation ignores two important details.
First, managers of firms in countries with weak regulatory environments can take actions
such as cross-listing or adopting International Financial Reporting Standards (IFRS) that
improve transparency and reduce information risk. Second, these actions generally
increase the target firm's value prior to the acquisition. In this dissertation, I examine
whether the increase in value from these strategies is fully impounded in the target's
stock price or whether such actions affect either the value or distribution of synergy gains
in cross-border acquisitions.2
During 2006, the announced value of cross-border mergers and acquisitions
accounted for nearly $1.3 trillion of the $4 trillion of global mergers and acquisitions
1 For simplicity, I use the term "regulatory environment" to refer to both the level of shareholder protection
and the transparency of disclosures in a given country.
2 As I discuss in more detail sh0l1ly, I define synergy gains as the total change in value of the acquiring
firm plus the change in value of the target firm. Additionally, unless otherwise explicitly stated, I refer to
mergers and acquisitions as mergers or acquisitions and use these terms interchangeably.
2(Economist 2007). Furthermore, the economic gains and the distribution of the gains from
cross-border acquisitions affects not only the firms involved, but also the economies of
the countries involved. Examining how the value and distribution of synergy gains are
affected by strategies taken before an acquisition to improve transparency increases our
understanding of the economic consequences of such decisions.
While taking actions such as cross-listing or adopting IFRS should reduce
information risk and increase the value of the firm, the extent to which these strategies
eliminate the valuation discount related to the target firm's regulatory environment is not
clear. Furthermore, it is unclear what impact these strategies have on the value and
distribution of synergy gains, and the total wealth of target firm shareholders. Doidge et
al. (2004) provide evidence that managers of firms in weak regulatory enviromnents can
reduce or eliminate valuation discounts arising from weak regulatory environments by
listing the firms' shares on an exchange with stronger regulatory protection. Similarly,
Hail and Leuz (2008) find that firms in countries with more transparent financial
reporting environments such as those with greater disclosure requirements have lower
costs of capital. The evidence in these studies suggest that taking actions such as cross-
listing the firm's stock or adopting IFRS reduces the valuation discount and increases the
firm's share price. In this case, the increase in value from the strategy will be impounded
in the target firm's share price prior to the acquisition. Since part of the synergy gain
from the merger and the premium paid to the target shareholders includes the elimination
of the valuation discount, the total synergy gains and the merger premium could be lower
for strategic firms than for non-strategic firms. As a result, taking actions to offset the
3valuation discount could actually result in target shareholders receiving a lower merger
premium. Thus, I first predict that the total synergy gain and the merger premium
received by target shareholders are lower for target firms from countries with weak
regulatory environments that cross-list their securities or adopt IFRS.
While the merger premium is likely to be lower for these strategic finns, the
decision to adopt cross-list or adopt IFRS should result in an overall increase in firm
value. The ex-post total gain to target shareholders from cross-listing or adopting IFRS is
equal to the sum of the gain in share price prior to the merger from the strategy (i.e., the
"strategy premium") plus the merger premium. Thus, when the merger premium is
combined with the strategy premium, I predict that the total valuation gains from the
acquisition and cross-listing or adopting IFRS will be positive.
Assessing the impact of cross-listing or adopting IFRS on the merger premium is
further complicated by the potential signal associated with these strategies. Coffee (2002)
argues that cross-listing signals that a firm has valuable growth opportunities.
Furthermore, cross-listing can provide a credible commitment by managers to take
advantage of valuable growth opportunities rather than expropriate minority shareholders.
Similar to cross-listing, voluntarily adopting IFRS could signal that a finn or its managers
are of high quality. Davis-Friday and Skaife (2008) find that firms that voluntarily adopt
IFRS are more likely to become cross-border takeover targets. Although actions taken to
improve transparency increase firm value through a reduction in risk, it is not clear
whether such actions serve as a signal of the quality of the firm or its managers and result
in higher synergy gains or merger premia.
4Therefore, for my second set of tests, I compare the value and distribution of the
synergy gains for strategic target firms to target firms in strong regulatory environments.
I expect higher total synergy gains and merger premia for strategic firms. That is, holding
information risk constant, cross-listing or adopting IFRS should serve as a signaling
mechanism about the target firm's managers or future growth opportunities, making the
firm a more valuable takeover target. As a result, competition among bidders increases,
driving the total synergy gain and the merger premium upward.
I test my predictions on a sample of cross-border acquisitions completed in 26
countries between 1995 and 2007. Specifically, I compare the total synergy gains and the
merger premium for target firms from weak regulatory environments that have cross-
listed or adopted IFRS (i.e., "strategic firms") to (l) target firms in similar countries that
have not taken such actions (i.e., "non-strategic firms") and (2) target firms in countries
with strong regulatory environments. For both comparison groups. I separately examine
the total synergy gain and the portion of the synergy gain to the target firm (i.e., the
merger premium). Next, to address the overall change in shareholder wealth from the
acquisition and from cross-listing or adopting IFRS, I develop a proxy for the total
valuation gains to target firms that is designed to incorporate both the strategy premium
and the merger premium. This allows me to compare strategic to non-strategic target
firms from weak regulatory environments.
My first set of tests provides evidence on whether strategies taken in advance of
an acquisition to improve transparency result in lower total synergy gains and merger
premia, but higher total valuation gains. I find no evidence that either the total synergy
5gains or the merger premium are smaller for strategic firms. In fact, I find some evidence
that the total synergy gains are higher for strategic target firms relative to non-strategic
target firms in weak regulatory environments. This result suggests that the target firm's
shareholders may not capture the valuation discount related to the weak regulatory
environment of the target that should be eliminated in the acquisition. Additionally, I find
only mixed support showing that the total valuation gains are higher for strategic firms
relative to non-strategic firms. This result provides some evidence that strategies to
improve transparency increase the overall wealth of shareholders if the firm is eventually
acquired.
My second set of tests provides evidence on whether strategies such as cross-
listing or adopting IFRS serve as signaling mechanisms that increases the total synergy
gain and the merger premium. However, I find no evidence to support this hypothesis.
This suggests that cross-listing or adopting IFRS may not serve as a signal, since when
information risk is held constant, the total synergy gain and the merger premium do not
differ across the type of firm acquired.
Despite the empirical evidence, my research makes contributions to several areas
of literature. First, I contribute to the mergers and acquisitions literature, and specifically
the cross-border mergers and acquisitions literature. Although prior research such as
Starks and Wei (2004) and Bris and Cabolis (2008) has investigated how synergy gains
are distributed when the acquirer and target are from different regulatory environments,
the results of these studies are mixed.
6I extend prior literature by examining how strategies taken before an acquisition
by the target finn to improve transparency and increase firm value influence the value
and distribution of synergy gains in cross-border acquisitions. Existing empirical research
in cross-border acquisitions has largely ignored how these strategies affect the value and
distribution of synergy gains. Furthermore, prior research does not examine the collective
valuation gains (i.e., the strategy premium and the merger premium). Thus, the results of
my research provide a potential explanation for the results of Rossi and Volpin (2004)
and the mixed results related to the distribution of gains reported in Starks and Wei
(2004) and Bris and Cabolis (2008).
I expand existing literature identifying and explaining strategies to eliminate
valuation discounts, and specifically, the minority shareholder discount (i.e., Reese and
Weisbach, 2002 and Doidge et aI., 2004, among others) by mapping the relation between
the cross-listing premium and the value and distribution of synergy gains in cross-border
mergers. Similarly, I extend the research by Bushman et aI. (2004) identifying the
determinants of corporate transparency by documenting the consequences of corporate
transparency in terms of the value and distribution of synergy gains.3 As a result, my
research bridges the literature investigating the sources and distribution of merger
synergies to literature analyzing methods to eliminate cross-country valuation discounts.
Thus, my research provides insights beyond simply identifying which party captures the
3 Bushman, Piotroski, and Smith (2004) define corporate transparency based on the firm-specific
information available to persons outside of publicly-traded firms based on financial transparency (i.e.,
financial information availability and dissemination) and governance transparency (i.e., the availability of
governance disclosures).
7synergy gains in cross-border acquisitions and separates signaling effects from reductions
in information risk due to cross-listing or adopting IFRS.
My research examines an increasingly important and economically significant
type of foreign direct investment, cross-border mergers and acquisitions. Although lack
of power could partially explain the limited support for my hypotheses, an alternative
explanation relates to the empirical models used in this study and in prior cross-border
mergers and acquisitions research. Specifically, the empirical models in most cross-
border acquisitions research draw heavily on domestic mergers and acquisitions research.
Since there is significant cross-sectional variation in firm-specific characteristics, studies
conducted in a purely domestic acquisition environment provide useful insights into the
determinants of the distribution of synergy gains resulting from economies of scale or
scope. However, these models may not explain the value and distribution of synergy
gains in cross-border acquisitions. Therefore, one avenue for future research is to develop
a separate and distinct model of the value and distribution of synergy gains in cross-
border acquisitions. If the merger premium does not differ for strategic firms relative to
non-strategic firms, it suggests that strategies to improve transparency and reduce
information risk may not result in higher valuation gains if the company is eventually
acquired.
8CHAPTER II
LITERATURE REVIEW
An extensive body of research examines the relations among various components
of the synergy gains from acquisitions. A complete review of the domestic and cross-
border mergers and acquisitions literature is beyond the scope of this dissertation.4 In this
section, I focus my discussion on two important aspects of my research. First, to motivate
the setting of cross-border mergers and acquisitions, I provide background on the cross-
border environment. Second, I discuss the most relevant results of prior domestic and
cross-border research on the magnitude and distribution of synergy gains.
Cross-Border Environment
The cross-border acquisition environment differs in many important ways from
the domestic acquisition environment. Prior research shows that differences in legal
environments (La Porta et al. 1997) are related to differences across countries in the
development of capital markets, ownership structures, dividend policies, firm size, and
firm value (La Porta et al. 2000). Additionally, differences in regulatory and disclosure
environments increase the complexity, and potentially the costs of cross-border
transactions relative to domestic transactions.
The legal environment, and more specifically, cross-country differences in the
minority shareholder rights, is one dimension that makes the cross-border acquisition
4 More complete reviews of the domestic mergers and acquisitions include Halpern (1983), Jensen and
Ruback (1983), Jarrell et al. (1988), and Andrade et al. (2001). For cross-border mergers and acquisitions,
Ghuari and Buckley (2003) and Shimizu et al. (2004) provide reviews of the literature.
9environment distinct from the domestic acquisition environment. Mergers often involve a
change in the control of the target firm and prior theoretical literature posits that the
classic agency problem arises from the separation of ownership and control (Coase 1937;
Fama and Jensen 1983; Shleifer and Vishny 1997). Regulations protecting investors can
alleviate the agency problem. La Porta et al. (2002) find significant cross-country
variation in the level of investor protection and that firm value is higher for firms located
in countries with better regulations protecting minority shareholders.
Voting rights of shareholders also differ across countries. Shleifer and Vishny
(1997) argue that voting rights on matters such as mergers are the single most important
legal right of shareholders. A large body of prior research documents substantial
differences in voting premia in countries such as Switzerland (20%) and Italy (82%)
(Zingales 1994; Horner 1988). These differences in voting premia suggest that agency
costs are significant and vary widely between countries.
Another way the cross-border acquisitions environment differs from the domestic
environment relates to the regulations of mergers and acquisitions across countries. For
example, some countries impose special rules regarding foreign investment. According to
the United Nations Conference on Trade and Development (UNCTAD), for 2006, 93
countries introduced changes to their policies regarding foreign direct investment, and of
the 184 regulatory changes, 20% of the changes were ranked as "less favorable" to
foreign investment.
Although Brakman et al. (2006) argue that international de-regulation stimulated
the most recent wave of cross-border mergers and acquisitions, consistent with the
10
evidence compiled by UNCTAD, some countries in more recent years have increased
regulations preventing or severely limiting foreign companies from making acquisitions.
Specifically, Japan implemented new regulations in September 2007 blocking
acquisitions of Japanese companies involved in the production of technologies for use in
weapons systems. The regulations also require investors to disclose plans to purchase a
10% or greater ownership stake 30 days in advance of the purchase (Sanchanta 2007).
Regulations affecting cross-border acquisitions such as those in Japan increase the
complexity of the acquisition.
In addition to increasing the complexity of the acquisition, regulations relating to
cross-border acquisitions can also increase the transactions costs of the acquisition. For
example, foreign acquirers in Japan have circumvented existing barriers to acquisitions
through the use of "triangular mergers" where the acquirer sets up a Japanese subsidiary
and the subsidiary completes the acquisition. Executing such complicated transactions
likely requires consultations from external teams of lawyers and private consultants and
thus, could cause firms to incur substantial costs. 5
Although mergers can result in synergistic gains through a more efficient
allocation of resources of the combined firm (Bradley et al. 1988), Das and Sengupta
(2001) suggest that cross-border acquisitions can be hampered by information
asymmetry. Consistent with this conjecture, Rossi and Volpin (2004) show that more
5 Leland's (2007) model of financial synergies from mergers and acquisition provides a possible
explanation for why managers might be willing to incur substantial transactions costs for a certain financial
structuring. Leland (2007) shows that when default costs for both acquirers and targets are high, the
financial synergies from a merger increase. Thus, firms with greater default costs before the merger will
have higher financial synergies from the merger. This is because diversification reduces the risk of default
and hence the probability of incurring default costs.
11
transparent accounting standards in a country are associated with higher levels of
acquisition activity in a country. In cross-border transactions, it is possible for the
financial reporting standards of the target and acquirer to differ. For example, the
accounting system could be more conservative, emphasizing measurements of assets
based on historical cost rather than estimates of fair value. Empirical evidence in Ball et
al. (2000) documents cross-country variation in financial reporting such that accounting
standards are more transparent in common-law countries relative to code-law countries.6
Davis-Friday and Skaife (2008) find that firms using either IFRS or U.S. GAAP and
firms that are audited by large audit firms (e.g., Big-6) are more likely to be takeover
targets. These results suggest that more transparent reporting and better external
monitoring by auditors reduces information asymmetry between multinational
corporations.
Healy and Palepu (2001) suggest that information asymmetry and agency costs
drive the demand for financial reporting. Under the capital markets transactions
hypothesis, managers have an incentive to provide voluntary disclosures to mitigate
information asymmetry between their firm and capital suppliers in order to lower the cost
of capital. This leads to the empirical prediction of an inverse relation between the level
of disclosure and the cost of capital and implies that one benefit of voluntary disclosure is
a reduction in the cost of capital. One motivation for cross-listing the shares on a foreign
exchange could be to pre-commit to a higher level of disclosure. Both Diamond and
Verrecchia (1991) and Leuz and Verrecchia (2000) argue that pre-commitment is
6 Ball et at. (2000) define transparency in terms of conservatism and timeliness.
12
necessary in order for disclosures to affect the cost of capital. Lang et al. (2003) contend
that cross-listing provides a credible signal that mangers are committed to a higher level
of disclosure.
Errunza and Miller (2000) find that the cost of capital is lower for cross-listed
firms. Lang et al. (2003) find that analyst following and forecast accuracy are higher for
firms that cross-list. Furthermore, they find that firm value is increasing in analyst
following and forecast accuracy and that it is incrementally higher for firms that cross-
list. Their results suggest that the increase in firm value following cross-listing is due to
improvements in the firm's information environment.
Acquiring a target firm that uses different accounting standards could also
increase the transaction costs. For example, a divergence in accounting standards
between the target and acquiring firms could impose additional information processing
costs, especially in efforts to perform due diligence.7 Diaz (2002) suggests that even
when U.S.-style disclosure practices have been adopted in a country, if the country lacks
enforcement mechanisms, the due diligence team should utilize additional tests in
assessing the quality and accuracy of financial information.
A 2006 global survey of 420 executives conducted by Accenture and The
Economist Intelligence Unit found that 71% of executives "agreed" or "strongly-agreed"
that cross-border acquisitions are "generally more difficult than acquisitions in our
existing markets" (Economist Intelligence Unit 2006). However, only 17% of survey
7 Consistent with this conjecture, each of the Big-4 accounting firms have a transaction advisory services
division that provide due diligence services specifically designed for cross-border deals.
13
respondents were satisfied with "the rigor and accuracy of their company's due diligence
on companies and markets". Thus, acquiring a firm in a country that utilizes different
accounting standards than the acquirer can result in increased costs to the acquirer in the
form of due diligence.
To summarize, the cross-border acquisition environment differs substantially
from the domestic acquisition environment. Cross-country differences in regulations of
cross-border acquisitions, financial reporting, and governance increase the complexity of
these transactions. My research examines how these differences affect the value and
distribution of gains in cross-border acquisitions. More specifically, I extend prior
research by investigating how actions target firm managers take in advance of the
acquisition, such as cross-listing, affect the overall wealth of their shareholders.
Synergy Gains
The synergy gain in a merger is the total change in value resulting from a merger.
That is, the synergy gain represents the change in value of the acquiring firm plus the
change in value of the target firm. Synergy gains can arise from numerous sources. For
example, operational synergies are generated from economies of scale or scope, from a
more efficient deployment of resources, from increased market power, or from reduced
agency costs.
I refer to the portion of the synergy gain represented by the change in the value of
acquiring firm as the "conglomerate gain" and the portion of the synergy gain represented
by the change in the value of the target firm as the "merger premium". A conglomerate
gain arises when the value of the acquiring firm increases following the announcement of
14
the acquisition. If the acquirer has overpaid for the acquisition, the conglomerate gain is
negative, reflecting a "discount" to the acquirer for overpaying. The remaining portion of
the synergy gain, the merger premium, arises in an acquisition when the price paid by an
acquirer exceeds the pre-acquisition market value of the target.
Prior research on cross-border mergers and acquisitions has examined how the
relation between the total synergy gains and the distribution of synergy gains is affected
by factors such as investor protection (Rossi and Volpin 2004; Bris and Cabolis 2008;
Starks and Wei 2004). Rossi and Volpin (2004) also find that the volume of merger
activity in a country is positively related to both the level of shareholder protection and
the quality of accounting standards. They also show that merger premia are increasing in
the level of shareholder protection. This suggests that shareholders of target firms in
weak regulatory environments are not able to fully capture the elimination of these
discounts when the firm is acquired. That is, the acquiring firm appears to capture a
portion of the discount by offering a lower acquisition price.8 However, their results
appear to be driven by U.S. and u.K. observations.
Starks and Wei (2004) find that for stock acquisitions, the market reaction for the
target firm is lower when the acquirer is domiciled in a country with strong minority
shareholder protection, but that the market reaction for the acquiring firm in these
acquisitions is higher. They interpret their results as evidence that differences in the level
8 Rossi and Volpin (2004) suggest an alternative explanation for why merger premia are higher when the
target firm is from a country with strong shareholder protection. Specifically, they argue that disperse
ownership is more common in countries with strong minority shareholder protection and that in the case of
takeovers, this worsens the free-rider problem. Thus, as in Grossman and Hart (1980), the acquirer must
pay a higher premium to give minority shareholders an incentive to tender their shares.
15
of minority shareholder protection between targets and acquirers affect the distribution of
synergy gains, but not the total synergy gains. Although the results of Bris and Cabolis
(2008) are mainly consistent with Starks and Wei (2004), Bris and Cabolis (2008) find
that the market reaction to the merger announcement for target firms is higher when the
acquirer is from a country with stronger protection of minority shareholder interests or
when the accounting standards in the country are more transparent and that the reaction is
not symmetric across acquiring and target firms. Thus, while prior research has shown
that cross-country differences in minority shareholder protections and accounting
standards affect merger premia, prior research has not found consistent results regarding
whether the total synergy gains or the distribution of synergy gains is affected by these
characteristics.
In addition to the inconclusive results in prior research regarding cross-country
differences in regulatory environments and the distribution of synergy gains, existing
empirical research in cross-border mergers and acquisitions has largely ignored how
strategies employed preceding an acquisition to increase firm value affect the value and
distribution of synergy gains. One exception is Starks and Wei (2004). They examine the
relation between cross-listing in the U.S. and (i) a direct measure of the merger premium
based on the ratio of the bid price to the target firm's stock price four weeks preceding
the merger announcement and (ii) a proxy for the merger premium based on abnormal
returns. They do not find an association with the first measure, but do find positive
abnormal returns for target firms cross-listed in the U.S. from G-7 countries (Canada,
France, Germany, Italy, Japan, the United Kingdom, excluding the United States).
16
However, they do not examine the collective valuation gains (i.e., the strategy premium
and the merger premium) for their sample of cross-listed firms.
In the domestic mergers and acquisitions literature, Bradley et al. (1988) show
that synergy gains are higher when there are multiple bidders involved and that changes
in the U.S. regulatory environment affected the distribution of gains between acquirers
and targets in domestic acquisitions, but not the total synergy gain. Prior research on
domestic mergers and acquisitions has examined the relation between the conglomerate
gain and factors such as the method of payment used by the acquirer (Travlos 1987), the
pre-acquisition firm value of the acquirer (Dong et al. 2006), diversifying versus non-
diversifying acquisitions (Morck, Shleifer, and Vishny 1990), whether there are multiple
bidders (Bradley et al. 1988), whether the acquisition is considered to be hostile (Moeller
et al. 2004; Schwert 2000) and the size of the acquiring firm (Moeller et al. 2004).
With respect to the conglomerate gain, prior research on domestic mergers and
acquisitions has shown that certain deal-level characteristics are associated with lower
gains to acquiring firms. Travlos (1987) finds that the method of payment used by the
acquirer influences the conglomerate gain. Specifically, his results show that for publicly
traded acquirers, there are lower abnormal returns to the acquirer around the
announcement date for stock acquisitions.9 Bradley et al. (1988) find that the
conglomerate gain is lower when there are multiple bidders. This is consistent with the
basic economic argument that as competition among potential acquirers increases, the
9 One proxy for the gain to acquiring firms in mergers is the estimated abnormal stock return over an
announcement interval.
17
target firm is able to extract a larger portion of the synergy gain from the acquirer, thus
lowering the portion of the synergy gain attained by the acquirer. Finally, there is limited
evidence that hostile acquisitions, i.e., those contested by the target firm's management,
are also associated with lower conglomerate gains (Moeller et al. 2004; Schwert 2000).
Empirical evidence also exists on the relation between firm-specific
characteristics and the size of the conglomerate gain in domestic acquisitions.
Specifically, Moeller et al. (2004) find that smaller firms earn higher conglomerate gains.
In a similar manner, Dong et al. (2006) show that acquirers with higher pre-acquisition
valuations earn lower conglomerate gains. Finally, Morck et al. (1990) find that publicly
traded acquirers earn lower conglomerate gains in diversifying acquisitions.
Although prior domestic mergers and acquisitions research suggests that target
firms extract a majority of the synergy gains, leaving negative returns to acquiring firms,
cross-border mergers and acquisitions research has not produced such a consistent
finding. More specifically, Starks and Wei (2004) find evidence of small positive gains to
U.S. acquirers involved in cross-border acquisitions. However, Bris and Cabolis (2005)
examine how relative differences in shareholder protection affect abnormal returns to
target and acquiring firms in cross-border mergers and acquisitions. They find significant
negative buy and hold cumulative abnormal returns for acquiring firms ranging from -1 %
to -5% depending on the returns window utilized. Additionally, they find significant
positive buy and hold cumulative abnormal returns to target firms ranging from 12% to
34% based on the returns window utilized.
18
Kuipers et al. (2009) find that on average, acquiring firms earn negative abnormal
returns, target firms earn positive abnormal returns, and that the total synergy gains based
on a weighted portfolio abnormal return of the acquiring and target firms are positive.
Eun et al. (1996) find that the merger premium is positive, but that the conglomerate gain
is either positive or negative depending on the country. While there appears to be
consistent evidence of positive merger premia in cross-border mergers and acquisitions,
the conglomerate gain can be either positive or negative, while total synergy gains are
positive.
Thus, characteristics of both the target and acquirer as well as the structure of the
acquisition influence the distribution of gains between finns in an acquisition. Prior
research examining the determinants of the gains to cross-border mergers and
acquisitions focuses on legal and institutional characteristics. I provide additional insights
into the cross-border merger and acquisition literature by examining the role alternative
courses of action managers take in advance to raise share price and improve disclosure
play in determining the total synergy gain and the distribution of these gains among
acquiring and target firms.
19
CHAPTER III
HYPOTHESIS DEVELOPMENT
To provide evidence on how cross-country differences in regulatory environments
affect the value and distribution of synergy gains in cross-border acquisitions, I compare
the value and distribution of synergy gains for firms from weak regulatory environments
that cross-list or adopt IFRS (i.e., strategic firms) across two separate samples. The first
comparison group consists of firms in weak regulatory environments that do not cross-list
or adopt IFRS (i.e., non-strategic firms). The second comparison group consists of target
firms domiciled in strong regulatory environments. For completeness, I develop separate
hypotheses depending on the strategy employed (e.g., cross-listing or adopting IFRS).
For simplicity, Table 1 summarizes my hypotheses.
Within Country Comparison
Cross-Listing
While prior research such as La Porta et al. (2002) shows that firm value is lower
in countries with weak protection of minority shareholders, managers can reduce or
eliminate this valuation discount by cross-listing the firm's stock on a stock exchange in a
country with stronger protection of minority shareholders. Firms incur substantial costs to
cross-list and these costs help bond managers to reduce their private benefits of control
(Coffee 1999,2002). Furthermore, Doidge et al. (2004) find that firms with growth
opportunities are more likely to cross-list. Therefore, by lowering the private benefits of
control, cross-listing reduces the likelihood of minority shareholder expropriation. Thus,
20
firm value generally increases following cross-listing (Doidge et al. 2004). Finally,
because cross-listing reduces the cost of capital, it enables managers to finance valuable
growth opportunities at a lower cost.
For the strategic firm, it is possible that the cross-listing premium fully captures
any valuation discount arising from weak protection of minority shareholders. Therefore,
the full gain from the elimination of the valuation discount could be impounded in the
pre-acquisition share price. For example, Doidge et al. (2004) find an average cross-
listing premium of 16.5%. To the extent cross-listing eliminates any discount for poor
shareholder protection, the acquisition (and elimination of minority ownership) would
have no incremental impact on the acquisition value of the target firm beyond that
already reflected in the existing share price. As a result, the acquisition price and merger
premium for the strategic firm will be unaffected.
Although cross-listing increases firm value, the value of the synergy gains and the
distribution to the target firm in the form of the merger premium in cross-border
acquisitions could be lower for strategic firms relative to non-strategic firms. Since the
acquiring firm will control the target company after the acquisition, any pre-acquisition
discount related to the weak protection of minority shareholders should be eliminated
through the acquisition. 1o The elimination ofthis discount therefore results in a higher
merger premium for the non-strategic firm.
10 Siegel (2005) suggests that because enforcement against cross-listed firms is infrequent, the popularity of
cross-listings is better explained by reputational bonding through information intermediaries such as
analysts. If there is less enforcement against cross-listed firms, then it is possible that cross-listing does not
fully eliminate the valuation discount. It is important to note that Siegel examines a sample of Mexican
21
Even if cross-listing does not fully eliminate the valuation discount from weak
minority shareholder protection, it is possible that the merger premium for strategic firms
will be lower than non-strategic firms simply as a result of how the merger premium is
measured. Consistent with prior research, the merger premium is measured as the change
in price for the target firm relative to the target firm's pre-acquisition stock price. If the
pre-acquisition stock price of cross-listed firms is higher relative to firms that have not
cross-listed, an equal acquisition price across the two target firms will necessarily result
in a relatively smaller merger premium (as a percent) for the cross-listed firm. I I In other
words, the acquisition price for the strategic firm would have to be much higher than for
the non-strategic firm in order for the strategic finn to earn the same merger premium as
the non-strategic firm. 12 As a result, for target firms from countries with weak regulatory
environments, this leads to the following hypothesis:
Hla: The total synergy gain and the merger premium are lower for firms with
cross-listed stock relative to firms without cross-listed stock.
firms that are cross-listed in the United States and therefore, his results provide only one example of where
legal bonding does not necessarily occur and his findings may not generalize to non-U.S. cross-listings.
II This outcome is similar to the effect large shareholders have on the likelihood of takeover and the merger
premia discussed in Shleifer and Vishny (1986). Specifically, Shleifer and Vishny (1986) argue that as the
percentage of shares held by a large shareholder increases, the likelihood ofa value-increasing takeover
increases and therefore, firm value increases. As a resu It, the premium decreases (see proposition 1, page
470).
12 For example, suppose the price of the strategic firm before cross-listing is $100. If the strategic firm
earns the average cross-listing premium as documented in Doidge et al. (2004), the stock price after cross-
listing, but before the acquisition would be $116.50. The pre-acquisition price of a similar, non-strategic
firm would be $100. Suppose that hold ing everything else constant across these two firms, the value to the
acquirer of each firm is $125. Thus, for the strategic firm, the merger premium is 7.30% (i.e., ($125-
116.50)/$116.50) while for the non-strategic firm, the merger premium is 25% (i.e., ($125-$100)/$100).
The acquisition price of the strategic firm would have to be $145.63 in order for the strategic firm to have
the same merger premium as a non-strategic firm. The acquisition price would need to be much larger than
$145.63 for the merger premium of the strategic firm to be significantly higher than the non-strategic firm.
22
Finding that the total synergy gain and the merger premium for strategic firms are lower
relative to the non-strategic firms suggests that at least a portion of the increase in value
from cross-listing is impounded in the share price before the acquisition.
Target firms that cross-list generally realize an increase in value upon cross-
listing (i.e., the cross-listing premium). If the merger premium for strategic firms is less
than the merger premium for non-strategic firms, one possible explanation is that cross-
listing changes the timing of the gains, but not the total gains to the target firm's
shareholders. In this case, the total valuation gains (i.e., the merger premium plus the
cross-listing premium) will not differ between strategic firms and non-strategic firms that
should not theoretically earn a cross-listing premium. 13
Alternatively, cross-listing in a country with stronger protection of minority
shareholders could signal to potential acquirers the existence of valuable growth
opportunities. Doidge et al. (2004) find that firms with growth opportunities are more
likely to cross-list and this suggests that managers of these firms cross-list in order to
finance growth opportunities at a lower cost of capital. These growth opportunities, along
with the potential for increased market power, could result in increased competition
among acquiring firms and drive the total synergy gain and the merger premium upward
for strategic firms relative to non-strategic firms. Thus, the total valuation gains will be
less for non-strategic firms than for strategic firms. This leads to the following hypothesis
for target firms from countries with weak regulatory environments:
13 This is consistent with the findings of Sarkissian and Schill (2009) who generally do not find evidence of
permanent valuation gains to cross-listing.
23
HI b: The total valuation gains are greater for target firms with cross-listed
stock than for target firms without cross-listed stock.
Finding that the total valuations gains for strategic firms are higher than non-strategic
firms suggests that either competition for strategic firms drives the total synergy gain and
merger premium higher, or that the acquirer is able to extract a portion of the valuation
discount by offering a lower acquisition price to the non-strategic firms.
Hypothesis 1b requires that cross-listing serve as a signal of the quality of a firm
or its managers. Coffee (1999, 2002) argues that cross-listing serves as a credible signal
both because it acts as a bonding mechanism that commits managers to not expropriate
shareholders and because it signals the presence of growth opportunities. Additionally,
prior research such as Doidge et al. (2004) and Lang et al. (2003) suggest that cross-
listing is a credible signal. Ball (2001) argues that cross-listing in a common-law country
imposes a positive cost on a company because it increases the firm's exposure to
litigation risk and thus serves as a credible signal of the quality of information. If cross-
listing does not serve as a credible signal of the quality of the firm or its managers, it
would bias against finding support for hypothesis 1b.
Adopting IFRS
La Porta et al. (2002) also show that accounting standards affect firm value. To
overcome information environment deficiencies, managers of firms located in countries
with less transparent accounting standards can adopt a more transparent set of accounting
standards such as IFRS. Adopting a more transparent set of accounting standards can
reduce information asymmetry between managers and both existing shareholders and
24
potential acquirers. Leuz and Verrecchia (2000) find that for a sample of German firms
voluntarily adopting either international accounting standards or u.s. GAAP. share
turnover increases, while bid-ask spreads decrease. Similarly. Hail and Leuz (2008) find
that firms in countries with more transparent financial reporting environments such as
those with greater disclosure requirements have lower costs of capital.
However, as in the case of cross-listing, it is possible that adopting IFRS
completely eliminates any valuation discount such that the price of the strategic firm
before an acquisition will be greater than the price of the non-strategic firm. As a result, if
a portion of the total synergy gain and merger premium in cross-border acquisitions is
due to the elimination of valuation discounts related to the information environment of
the target firm's country, the total synergy gain and merger premium for the strategic firm
will be lower than for the non-strategic firm. When target firms are located in countries
with less transparent information environments, this leads to the following hypothesis:
H2a: The total synergy gain and the merger premium are lovverforfirms that
have voluntarily adopted IFRS relative toflrms that have not voluntarily
adopted IFRS.
Finding that the total synergy gain and the merger premium are lower for the strategic
firms relative to the non-strategic firms suggests that at least a p011ion of the increase in
value from the strategy is impounded in the pre-acquisition stock price of the target firm.
Prior research provides evidence that voluntarily adopting IFRS reduces the cost
of capital (Leuz and Verrecchia 2000).14 As in the case of cross-listing, voluntarily
14 However, Daske et al. (2008) find that the reduction in the cost of capital is greater for more "serious"
voluntary adopters ofIFRS. More specifically, Daske et al. (2008) identify "serious" adopters based on (i)
25
adopting IFRS could alter the timing of the gains, but not the total gains to the target
firm's shareholders. In this case, the merger premium for strategic firms will be less than
the merger premium for non-strategic firms. Therefore, when the increase in value from
adopting IFRS is added to the merger premium, the total valuation gains will not differ
between strategic firms and non-strategic firms.
However, voluntarily adopting IFRS could signals that a firm or its managers are
of high quality and increase competition among bidders. If this is the case, voluntarily
adopting IFRS will drive the total synergy gain and merger premium upward. Thus, the
total valuation gains to the shareholders of strategic firms will be higher relative to non-
strategic firms utilizing local accounting standards. This leads to the following hypothesis
for target firms from countries with less transparent information environments:
H2b: The total valuations gains are greater for target firms that have
voluntarily adopted IFRS relative to firms that have not voluntarily
adopted IFRS.
There are two potential explanations for finding that the total valuation gains for strategic
firms are higher relative to non-strategic firms. Specifically, this result suggests that
voluntarily adopting IFRS either increases competition among bidders or that the buyer
extracts a portion of the target's valuation discount from the weak information
environment of the country by paying a lower acquisition price for non-strategic firms.
As with cross-listing, hypothesis 2b requires that voluntarily adopting IFRS serve
as a signal of the quality of a firm or its managers. Watts and Zimmerman (1986, Chapter
the length of the annual report after adoption ofIFRS, (ii) a compliance score, (iii) the magnitude of
accruals relative to cash flows, and (iv) reporting incentives.
26
7) argue that information asymmetry provides managers with an incentive to signal when
they believe the firm is undervalued. Therefore, undervalued firms commit added
resources to explicitly signal their value while overvalued firms implicitly signal their
value by not providing additional disclosures. Thus, if voluntarily adopting IFRS is costly
because it increases the volume or transparency of disclosures, then firms voluntarily
adopting IFRS should realize an increase in firm value.
However, Watts and Zimmerman (1986, Chapter 7) point out that for disclosures
to serve as a signal, the costs incurred to produce additional disclosures should be to
provide disclosures related to future performance. If the costs incurred produce additional
disclosures related to historical rather than future performance, the social benefit of the
disclosures is reduced. Furthermore, Spence (1973) shows that in order for a signal to be
relevant, managers must have the flexibility to choose among different signaling options.
Thus, the strength of the signal from voluntarily adopting IFRS may be lower for target
firms in countries already on a roadmap to adopting IFRS. Finally, Ball (2001) argues
that auditors and litigation significantly influence the effectiveness of the accounting
system. Therefore, in order for voluntarily adopting IFRS to serve as a credible signal,
adequate enforcement mechanisms must be in place. To the extent the countries in my
sample of firms have insufficient enforcement mechanisms through auditors and
litigation, voluntarily adopting IFRS will not serve as a signal of the quality of the firm or
its managers and would bias against finding evidence in support of the first set of
hypotheses. Figure 1 illustrates hypotheses 1a through 2b.
27
Merger
Premium
Strategy
Premium
Firm
Value
Strategic Non-Strategic
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
· .
Merger
Premium
Firm
Value
Figure 1: Within Country Comparison
Cross-Country Comparison
Results from my first set of hypotheses provide insights into whether managers of target
firms in weak regulatory environments that have undertaken a strategy to improve
transparency obtain lower total synergy gains and merger premia, but higher total
valuation gains relative to firms in similar environments that have not undertaken such a
strategy. To provide additional insights into how cross-listing and adopting IFRS affect
the value and distribution of gains in cross-border acquisitions, I compare the value and
distribution of synergy gains for firms in countries with weak regulatory environments
that have undertaken a strategy to improve transparency (i.e., strategic firms) to target
firms located in countries with strong regulatory environments. This comparison allows
me to hold information risk constant and isolate the potential signaling effects from
cross-listing or adopting IFRS. Figure 2 illustrates hypotheses 3 and 4.
28
Cross-Listing
Coffee (2002) argues that cross-listing signals valuable growth opportunities.
Since firm value is lower in countries with weak minority shareholder right, the growth
opportunities of firms in these countries are also discounted. Thus, cross-listing provides
a signal of both firm and managerial quality by committing managers to take advantage
of valuable growth opportunities instead of expropriating shareholders. If strategic firms
have more growth opp0l1unities, these growth opportunities and the potential for
increased market power increase competition among bidders and drive the total synergy
gain and the merger premium upward. Comparing target firms located in countries with
strong shareholder protection to target finns from countries with weak protection of
minority shareholders that have cross-listed stock, leads to the following hypothesis:
H3: The total "ynergy gain and the merger premium are higher for firms fi'om
countries with weak protection ofminority shareholders with cross-listed
stock relative to targetfirms from countries with strong protection of
minority shareholders.
Adopting IFRS
Voluntarily adopting IFRS reduces the information risk of companies in less
transparent information environments to the level of information risk in more transparent
information environments. Thus, when information risk across target firms is
comparable, voluntarily adopting IFRS can signal that a firm or its managers are of high
quality. Thus, competition for finns that voluntarily adopt IFRS to improve transparency
could be greater than for those firms from strong information environments, driving the
total synergy gain and merger premium upward. This leads to the following hypothesis:
29
H4: The total synergy gain and the merger premium are higherfor firms from
countries with weak information environments that have voluntarily
adopted IFRS relative to target firms from countries with strong
information environments.
Merger
Premium
Strategy
Premium
Fim1
Value
Strategic Traditional
· .
· .
· .
· .
· .
· .
· .
Merger
Premium
Firm
Value
Figure 2: Cross-Country Comparison
Table I
Summary of Hypotheses
Panel A: Within Country Comparison by Firm-Type (Both Weak)
Panel B: Cross-Country Comparison by Firm-Type (Weak vs. Strong)
Total Synergy Gains &
Merger Premia
Total Valuation Gains
from Merger & Strategy
Total Synergy Gains &
Merger Premia
Hla & H2a
Hlb
H2b
H3&H4
Strategic
,1IJand
Premium
TotalLl Vl)(USl'
TotalLl VjAC l'G
Strategic
,1IJand
Premium
Non-Strategic
,1IJand
<
Premium
> TotaLd Vl:'(USl'
> TotaLd Vl'AC 'lG
Traditional
,1IJand
>
Premium
30
CHAPTER IV
RESEARCH DESIGN
Synergy gains from a merger or acquisition can be a result of economies of scale,
reallocation of assets or resources to exploit investment opportunities, and more efficient
management. Consistent with prior research, I define the total synergy gain as the change
in value of the acquiring firm plus the change in value of the target firm. More formally:
SynergyGain = IJ.VA + IJ.VT (1)
where SynergyGain represents the total synergy gain from the cross-border acquisition
and IJ.VA (IJ.VT) represents the change in value of the acquiring (target) firm following the
acquisition. Thus, in equation (1), IJ.VA and IJ.VT represent the portion of the synergy gain
captured by the acquiring and target firms, respectively. I refer to these respective values
as the conglomerate gain and the merger premium.
While the theoretical constructs for the conglomerate gain, the merger premium,
and the total synergy gain are relatively straightforward and intuitive, the empirical
constructs are less obvious. Furthermore, determining the total valuation gains to
strategic firms requires a measure ofthe "strategy premium" (i.e., the cross-listing
premium or the premium from voluntarily adopting IFRS). In the next four subsections, I
discuss how I measure the conglomerate gain, merger premium, total synergy gain,
strategy premium, and total valuation gains for strategic firms. Table 2 provides a list of
variables and their definitions.
Table 2
Variable Definitions
Variable Name Description
Panel A: Total Synergy Gains and Components of Total Synergy Gains
31
Source: SDC
Acquirer
APriceDay
APrice4Week
ConglomerateGain
AShrout
L1MVEA
Target
PricePaid
TPrice4Week
Premium
TShrout
L1MVEr
Combined
W
L1II
AcquireI' closing stock price on the announcement date.
AcquireI' closing stock price four weeks preceding the announcement
date.
Conglomerate gain calculated as (1) the difference between the closing
stock price of the acquirer on the announcement date less the closing
stock price of the acquirer four weeks preceding the announcement date,
divided by (2) the closing stock price of the acquirer four weeks
preceding the announcement date (i.e., (APriceDay-
APrice4 Week)/APrice4 Week).
AcquireI' number of shares outstanding on date of announcement.
Market value of equity of the acquirer on the announcement date, less
the market value of equity of the acquirer four weeks preceding the
announcement (SDC variable name AMV). The market value of equity
of the acquirer on the announcement date is measured as APriceDay
multiplied by the number of shares outstanding, AShrout.
Share price paid for the target firm.
Target closing stock price four weeks preceding the announcement date.
Merger premium calculated as (1) the difference between the price paid
for the target less the closing stock price of the target four weeks
preceding the announcement date, divided by (2) the closing stock price
of the target four weeks preceding the announcement date (i.e.,
(PricePaid-TPrice4Week)/TPrice4Week). Natural log used in empirical
analyses.
Target num bel' of shares outstanding on date of announcement.
Market value of equity of the target on the announcement date, less the
market value of equity of the acquirer four weeks preceding the
announcement (SDC variable name MV). The market value of equity of
the target on the announcement date is measured as PricePaid
multiplied by the number of shares outstanding, TShrout.
Market value of equity of the acquirer (SDC variable name MV) plus
the market value of equity of the target (SDC variable name AMV), both
measured four weeks preceding the announcement date.
Total synergy gain calculated as WL1MVEA+ WL1MVEr.
Table 2 (continued)
Panel B: Dependent Variables
In(f1II) Natural log of 100 + f1II.
In (Premium) Natural log of 100 + Premium.
In (TotaliJ VlXLlSd Natural log of 100 + TotaliJ VlXLlsr.
In (TotaliJ ViACTG) Natural log of 100 + TotaliJ ViACTG'
Panel C: Test Variables
32
Source: Worldscope
StrategicxLlsT Indicator variable equal to one if the target firm had cross-listed stock and
zero otherwise (based on STK_EXCH_LlSTED variable in Worldscope).
See Appendix A for more information.
StrategicNRs Indicator variable equal to one if Early Voluntary or LateVoluntary equal
one and zero otherwise (based on ACTG_STANDARS variable in
Worldscope). See Appendix A for more information.
Panel D: Tobin's Q and Cross-Listing Premium Variables
Source: Worldscope
Assets
BVE
MVEQ
Sales
QAi'iG
dQAC'l(j
IMVExLlsT
TotaliJ V'l)(LlST
TotaliJ ViAC'l(j
Total assets.
Book value of equity.
Market value of equity used to calculate Tobin's Q.
Total sales.
Tobin's Q for firms that voluntarily adopted IFRS, calculated as [(Assets-
BVE)+MVEQ] I Assets. Sample oftal"get and non-target firms matched on
(i) country, (ii) year, (iii) one-digit SIC, and (iv) sales.
Tobin's Q for firms that did not voluntarily adopted IFRS, calculated as
[(Assets-BVE)+MVEQ] I Assets. Sample of target and non-target firms
matched on (i) country, (ii) year, (iii) I-digit SIC, and (iv) sales.
Premium for voluntarily adopting IFRS, calculated as Q4C1G- QNONAC'l(j.
Implied market value of equity. Calculated for both cross-listed and non-
cross-listed firms as (Assets*QNoNXLlSi)-(Assets-BVE).
Implied market value of equity. Calculated for both for firms that
voluntarily adopted IFRS and did not voluntarily adopt IFRS. Calculated
as (Assets*QNO\Ai jG)-(Assets-BVE).
Total valuation gains. Calculated for both cross-listed and non-cross-
listed firms as [(PricePaid*TShrout) -IMVExLlsr] IIMVExLlsT.
Total valuation gains. Calculated for both for firms that voluntarily
adopted IFRS and did not voluntarily adopt IFRS as
[(PricePaid* TShrout)-IMVEAC'lG] IIMVEAC1G.
Source: Doidge et al. (2004)
QXLlST Tobin's Q (cross-listed firms) equal to [(Assets-BVE)+MVEQ]IAssets.
QNOi\XLlST Tobin's Q (non-cross-listed firms) equal to [(Assets-BVE)+MVEQ]IAssets.
dQXLlST Cross-listing premium calculated as QXLlsr QNONXLlST.
33
Table 2 (continued)
Panel E: Control Variables
Source: SDC
TargetSize
TenderOfJer
Contested
Cash
Stock
Hostile
The natural log of the target firm's market value of equity four weeks
preceding the merger announcement.
Indicator variable equal to one if the deal is a tender offer, zero otherwise.
Indicator variable equal to one if there is more than one bidder, zero
otherwise.
Indicator variable equal to one for cash payment method, zero otherwise.
Indicator variable equal to one for stock payment method, zero otherwise.
Indicator variable equal to one for hostile deal attitude, zero otherwise.
Protection
Anti-Director
Rights
Source: La Porta et al. (1998)
Rule ofLaw Proxy for the law and order tradition in a country ranging between zero
and ten. Measured by the International Country Risk rating agency.
Calculated as an average of the monthly ratings from April and October
of 1982-1995.
Equally weighted index that is formed by adding one when (i) the country
allows shareholders to mail their proxy vote to the firm, (ii) shareholders
are not required to deposit their shares prior to the general shareholders'
meeting, (iii) cumulative voting or prop011ional representation of
minorities in the board of directors is allowed, (iv) an oppressed
minorities mechanism is in place, (v) the minimum percentage of share
capital that entitles a shareholder to call for an extraordinary
shareholders' meeting is less than or equal to ten percent (the sample
median), or (vi) shareholders have preemptive rights that can be waived
only by a shareholders' vote.
The level of shareholder protection in a country. Calculated as the
product of Rule of Law and Anti-Director Rights divided by ten.
Measuring the Conglomerate Gain
I measure the conglomerate gain (ConglomerateGain) as the closing price of the
acquiring firm on the announcement date (APriceDay) less the closing price of the
acquiring firm four weeks prior to the announcement (APrice4Week), divided by the
closing price of the acquiring firm four weeks prior to the announcement (APrice4Week).
The data for these variables are obtained from SDC.
34
Measuring the Merger Premium
I obtain the merger premium (Premium) from SDC. Specifically, SDC measures
the merger premium as the price paid for the target firm (PricePaid) less the stock price
of the target firm four weeks prior to the announcement (TPrice4Week), divided by the
stock price of the target firm four weeks prior to the announcement (TPrice4Week).
Measuring the Total Synergy Gain
Empirically, I measure the total synergy gain as the sum of the change in the
market value of equity of the acquiring firm, plus the change in the market value of
equity of the target firm, where each component is scaled by the sum of the acquirer and
target firm market values of equity. Thus, the total synergy gain is:
(2)
where Wi is equal to one divided by the sum of the market value of equity for the acquirer
and target, both measured four weeks prior to the announcement. I measure the market
value of equity four weeks prior to the announcement to be consistent with prior research
such as Bradley et al. (1988) and Starks and Wei (2004) who match their measurement of
market value of equity to coincide with the start date for measuring the merger premium.
More specifically, i1MVEA is the market value of equity of the acquiring firm on
the date of the announcement, measured as the price of the acquiring firm on the date of
the announcement multiplied by the shares outstanding on the date of the announcement
(i.e., APriceDay*AShrout) less the market value of equity four weeks prior to the
announcement (i.e., AMV per SDC). i1MVEr is the market value of equity of the target
firm on the date of the announcement, measured as the price paid by the acquiring firm
35
multiplied by the shares outstanding on the date of the announcement (i.e.,
PricePaid*TShrout) less the market value of equity four weeks prior to the
announcement (i.e., MV per SDC).
To illustrate the measurement of the total synergy gain, suppose the market value
of equity of the acquirer on the date of the announcement (APriceDay*AShrout) is
$1,200,000 and four weeks preceding the announcement date, the market value of equity
of the acquirer (AAIV) was $1,000,000. Further assume that for the target firm, the market
value on the announcement date (PricePaid*TShrout) was $650,000 and four weeks prior
it was $500,000 (MV). Thus, WiL1VA equals (200,000)/(1,000,000+500,000) and WiL1VT
equals (150,000) 1(1,000,000 + 500,000). As a result, L1IL would be 0.23 (i.e.,
1-0.13+0.10). )
Measuring the Strategy Premium and the Total Valuation Gains
Prior research such as Doidge et al. (2004), have typically measured the cross-
listing premium using Tobin's Q. However, the mergers and acquisitions literature
measures the total synergy gains and its components using changes in stock prices. Thus,
Tobin's Q cannot easily be combined with the merger premium to detennine the total
valuation gains for strategic firms.
To circumvent this issue and compute total valuation gains, I convert the strategy
premium from a Q-based measure to a price-based measure using the procedure I outline
below. In general, for my sample of strategic target finns and for each strategy, I
15 In my empirical analysis, 1 transform the dependent variables by first adding 100 to the variable and then
taking the natural log. Thus, using this example, the dependent variable would be 4.61 (=In(IOO.23)).
36
construct a proxy for the implied market value of equity as if the company had not
undertaken a strategy. This procedure enables me to combine the merger premium with
the respective strategy premium to determine the total valuation gains for strategic firms.
More specifically, to convert the strategy premium from a Q-based measure to a
price-based measure, I utilize a country-specific measure of Tobin's Q for firms that have
not cross-listed and another for firms that have not voluntarily adopted IFRS. Consistent
with Doidge et al. (2004), I measure Tobin's Q as:
Q= [(Assets-BVE)+MVEQ] / Assets (3a)
Thus, the strategy premium for each strategy is calculated as the difference between
Tobin's Q for strategic firms and Tobin's Q for non-strategic firms.
Next for the sample of strategic firms, I substitute into equation (3a) firm-specific
measures of total assets (Assets) and book value of equity (BVE), and either a country-
specific measure of Tobin's Q for firms that are not cross-listed (QNoNXLlST) or a country-
specific measure of Tobin's Q have not voluntarily adopted IFRS (QvONACTG).16 Using
this information, I solve for the implied pre-acquisition market value of equity for each
target firm (lMVExLlST) as if the firm did not have cross-listed stock. Similarly, I solve for
the implied pre-acquisition market value of equity for each target firm (lMVEACTG) as if
the firm had not voluntarily adopted IFRS. Thus, I rearrange equation (3a) as follows:
IMVExLlsT = (QNoNxLlsT*Assets) - (Assets-BVE)
IMVEACTG = (QNoNAcTG*Assets) - (Assets-BVE)
(3b)
(3c)
16 As discussed below, due to data limitations, ] use different methods for each strategy to calculate the total
valuation gains.
37
For example, suppose a firm with cross-listed stock has assets of $1 00 million and
book value of equity of $30 million. Further assume that QNONXLlST in the country the firm
is domiciled in equals 1.2. This means that the implied pre-acquisition market value of
equity for this firm is $50 million (i.e., (1.2*$100)-($100-$30)).
Finally, to calculate the total valuation gains for cross-listed firms, I take the
implied market value of equity (calculated above) subtracted from the market value of the
target firm on the announcement date, divided by the implied market value of equity. I
calculate these variables as [(PricePaid*TShrout)-JMVExLlST]/JMVExLlST and
[(PricePaid*TShrout)-JMVEACTG]IJMVEACTG, respectively and denote these variables as
TotalJVTxLlsTand TotaIJVTAcTG. Suppose the market value of equity at the announcement
date for the firm described above was $65 million. In this case, TotalJ VTXLlST would equal
0.30 (i.e., (65-50)/50). Thus, the total valuation gains from the merger and the strategy for
this firm would be 30%.
One limitation to the method described above is that Worldscope only provides
cross-listing status for the most recent fiscal-year. Thus, for a company that was acquired
in 2004, I can only identify whether it was cross-listed at that time, but cannot identify
the cross-listing status in earlier years. Due to this data limitation, I utilize the country-
specific measures of Tobin's Q from Doidge et al. (2004).17 They measure Tobin's Q as
of December 31, 1997. Therefore, in sensitivity analyses, I limit my sample to a five-year
window of acquisitions announced between 1995-1999.
17 See Doidge et aJ. (2004), Table], pages 2] 9-220.
38
To calculate the implied market value of equity for firms that voluntarily adopted
IFRS, I construct a sample of non-target and target firms from which I calculate Tobin's
Q for the strategic and non-strategic firms. Specifically, I match my sample of strategic
target firms to strategic non-target firms based on country, year, one-digit industry codes,
and size. I use sales as my proxy for size and I require matched firms to have sales
between 50% and 200% of the target firm's sales. I use a similar method to find a sample
of non-strategic non-target firms. Each firm serves as a match only once. I use the
matched non-target firms and target firms to calculate IMVEAcTc. As in Doidge et al.
(2004), the sample for which I calculate Tobin's Q must have complete data to calculate
Tobin's Q.18 I also require that book value of equity be positive. The variables used to
calculate Tobin's Q are obtained from Thomson's Worldscope database.
Within Country Comparison: Research Design for Tests ofHla-H2b
Hypotheses la and 2a both contain two parts. To test each part of these
hypotheses, I use two separate regressions. To test whether the total synergy gains are
lower for strategic target firms relative to non-strategic target firms, I regress my proxy
for the total synergy gain, In(LlJI) on an indicator variable equal to one if the target firm
has undertaken a strategy in advance of the acquisition and a set of control variables.
More specifically, my regression model is as follows:
+ ~5Contestedi + ~6Cashi + ~7Stocki + ~8Hostilei + Ej (4)
18 Note that Doidge et al. (2004) require that their sample include (1) only non-financial firms, (2) firms
with total assets in excess of$100 million and (3) firms with complete data to calculate Tobin's Q. I do not
make the first two requirements because I do not restrict my samp Ie of acquisitions to only non-financial
firms and also expect that some smaller firms will be targets in cross-border acquisitions.
39
For simplicity, the variable Strategic in equation (4) identifies either a firm that has cross-
listed stock or has voluntarily adopted IFRS (i.e., StrategicxLIsr or StrategicACTG are equal
to one). In all of my regression models, an acquisition constitutes an observation. I run
separate regressions to test the relation between the dependent variable and each strategy.
Finding a negative and statistically significant coefficient on ~I provides support for
hypotheses 1a and 2a.
To test whether the distribution of the gains to strategic target firms is lower
relative to non-strategic target firms, I run the same regression as above, except I use
In (Premium) as the dependent variable. That is, I run the following regression:
In(Premium)i = (Xi + ~IStrategici + ~2Protectioni + ~3TargetSizei + ~4TenderOfreri
+ ~5Contestedi + ~6Cash, + ~7Stocki + ~8Hostilei + Ej (5)
Again, finding a negative and statistically significant coefficient on ~l provides support
for hypotheses la and 2a.
To test hypotheses 1band 2b, for each strategy, I regress the dependent variable
In (TotaliJ Vr) on an indicator variable equal to one if the target firm is a strategic firm and
a set of control variables. 19 Specifically, I run the following regression for each strategy:
In(TotaliJVr)i = (Xi + ~IStrategici + ~2Protectioni + ~3TargetSizei + ~4TenderOfleri
In equation (6) finding a positive and statistically significant coefficient on ~ I provides
support for hypotheses 1band 2b.
19 For brevity, in equation (6) I refer to the dependent variable as In (TotalLl V'l)' However, I run separate
regression for each dependent variable (i.e., In(TotalLl V1XUSY) and /n(Tota/Ll VTAcnJ, respectively).
40
In addition to Strategic, my variable of interest, I include the same set of control
variables in equations (4)-(6). The variable Protection controls for the level of
shareholder protection in the target firm's country. TargetSize, TenderOfJer, Contested,
Cash, Stock, and Hostile all control for deal-specific characteristics and are obtained from
SDC. TargetSize is the natural log of the target firm's market value of equity four weeks
preceding the merger announcement. TenderOfJer represents an indicator variable equal
to one if the deal is a tender offer and zero otherwise. Contested is an indicator variable
equal to one if there is more than one bidder and zero otherwise. Cash is an indicator
variable equal to one if the method of payment is cash and zero otherwise. Stock is an
indicator variable equal to one if the method of payment is stock and zero otherwise.
Thus, acquisitions that are financed entirely with debt or use a mixture of payment
methods serve as the base case. Finally, Hostile is an indicator variable equal to one if the
deal attitude is hostile and zero otherwise.
The tests of hypotheses 1a through 2b rely on several assumptions and I restate
them here for completeness. First, I assume that Protection proxies for country-specific
transparency and that there is little variation in firm-specific transparency. Thus, I assume
that StrategicxLfsT and Strategic/FRS capture all the differences between the level of
transparency in the firm and the level of transparency in the country. I also assume that
target firms in weak regulatory environments with cross-listed stock have cross-listed on
an exchange that provides stronger protection of minority shareholders. To the extent this
assumption is incorrect, it should bias against finding evidence of my hypotheses, as
cross-listing would not provide the requisite positive signal to acquiring firms.
41
Additionally, I assume that IFRS is more transparent than local GAAP. Again, to the
extent this assumption is incorrect, it would bias against finding evidence supporting my
hypotheses, because adopting IFRS would not serve as a positive signal to acquiring
firms.
In addition to the assumptions outlined above, the research design for the tests of
hypotheses 1a through 2b requires that non-strategic target firms in a country serve as a
valid control group. Prior research suggests that such firms do serve as an appropriate
control group. Specifically, Leuz and Wysocki (2008) suggest that in tests involving
voluntary disclosure or cross-listing decisions, strategic firms (i.e., those cross-listing or
voluntarily adopting IFRS) should be compared to non-strategic finns (i.e., those not
cross-listing or not voluntarily adopting IFRS) within the same country.20 Finally, I
assume that the gains to the acquirer are constant for both acquisitions of strategic and
non-strategic firms.
Cross-Country Comparison: Research Design for Tests of Hypotheses 3 and 4
To test my third and fourth hypotheses, I use a similar research design to that used
to test hypotheses 1a and 2a. For each hypothesis, I examine two regression models. The
first model regresses my proxy for the total synergy gain, In(iJIJ) on an indicator variable
equal to one if the target firm is a strategic firm and the same set of control variables
discussed above. In the second model, the dependent variable is my proxy for the merger
premium, In(Premium). More specifically, I run the following regressions:
20 Leuz and Wysocki (2008) also suggest that another relevant comparison is to examine the same firm that
has not cross-listed.
42
(7)
In(PremiumJj = Uj +- ~lStrategici +- ~2Protectioni +- ~3TargetSizei + ~4TenderO.fferi
+ ~5Contestedi + ~6Cashi + ~7Stocki + ~8Hostilei +- Ej (8)
In both equations, a significant positive coefficient on ~l provides support for the third
and fourth hypotheses. As in the within country comparison, I additionally assume that
that the gains to the acquirer are constant for both acquisitions of strategic and traditional
firms.
43
CHAPTER V
RESULTS
Descriptive Statistics and Regression Results
My empirical tests use the universe of cross-border mergers and acquisitions
obtained from Thomson Reuters' SDC Platinum database completed between January 1,
1995 and December 31, 2007. I select 26 countries as the basis for my sample (Australia,
Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Hong Kong,
India, Ireland, Italy, Japan, Malaysia, Mexico, the Netherlands, New Zealand, Norway,
Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, and the United
Kingdom)?1 Of the 4,586 cross-border mergers and acquisitions for these countries
during this time period, 1,071 cross-border acquisitions can be matched to Worldscope.
Panels A and B of Table 3 summarize cross-border acquisitions between acquirer-
target country-pairs for the time period for each sub-sample used to test my hypotheses.
Acquirers are listed in the column and targets are listed across the row. For the within
country sample, the most frequent acquirer-target country-pair is between a target from
South Africa and an acquirer from the United Kingdom (39 observations). For the cross-
country sample, the most frequent acquirer-target country-pair is between a target from
Australia and an acquirer from the United Kingdom (67 observations). In many cases,
zero transactions occur between an acquirer-target country-pair in this time period.
21 To avoid potentially biasing my results in favor of my hypotheses, I do not include the United States in
my study since a significant number of the transactions in SOC involve U.S. targets or acquirers.
44
Table 4 provides correlations between the dependent variables and control
variables. Table 4, panel A provides correlations for the within country sample and panel
B reports correlations for the cross-country sample. Bold correlation coefficients indicate
significance with a p-value of less than 0.01. In panel A, In(11n) is not significantly
correlated with StrategicxLlsT or StrategiclFRS. In(Premium) is also not significantly
correlated with StrategicxLlsT or StrategiclFRS. Furthermore, In(Total11VTxLlsr)
(In(Total11VTAcTG )) is not significantly correlated with StrategiC'(LfST (StrategicIFRS). In
panel B, In(11II) is not significantly correlated with StrategicXLlsT or StrategiclFRS.
In(Premium) is also not significantly correlated with StrategicxLlST or StrategiclFRS.
Hypotheses la through 2b examine firms in countries with weak regulatory
environments by comparing the total synergy gains, merger premia, and total valuation
gains of strategic firms to non-strategic firms. I use shareholder protection indices for 49
countries from La Porta et al. (1998) to classify the regulatory environment in a country
as strong or weak. Similar to Rossi and Volpin (2004), I calculate Protection as the
product of the rule of law and anti-director rights index, divided by ten. I classify a
country as having a strong regulatory environment if Protection for a given country is in
the top quintile for all 49 countries. All other countries are classified as having a weak
regulatory environment. Thus, my classification of countries with weak regulatory
environments includes countries with "average" regulatory environments as well those
countries with below average regulatory environments. For my sample, this method
classifies Australia, Canada, Hong Kong, Japan, Norway, New Zealand, and the United
Kingdom as countries with strong regulatory environments.
Table 3
Cross-Border Mergers and Acquisitions Activity
Panel A: Within Country Sample
f-<
.....l
--< W ~ ::.:: 0-
--< 0 ><
[/] 0 f-< 0- W ...... ~~ W 0::: ::r: w :z: :z: 0::: .....l --< W >- .....l 0::: 0 ~
--<
....[/] r;: ~ 0::: t: 0
--< CO CO U 0 0 w ......
-
~ ~ :z: 0- [/] [/] N f-<
AUS 0 0 0 0 3 2 0 0 0 I 2 0 0 3 I I 2 0 I 16
AUT 0 I 0 1 14 0 0 0 I 2 0 I 0 0 1 0 0 0 0 21
BEL 0 0 2 1 10 0 4 I 19 0 0 I 0 0 5 I 0 0 0 44
BRA 0 0 0 0 0 0 0 0 I 0 0 0 0 0 0 I 0 0 0 2
CAN 2 2 1 0 1 0 2 0 5 2 2 0 I 0 0 0 I 6 5 30
CHE 1 1 0 0 24 0 7 0 11 5 2 4 2 0 3 2 I 5 I 69
DEU 11 2 0 24 0 0 10 5 29 5 I 18 0 2 I 3 0 9 0 120
DNK 0 0 0 0 1 0 0 2 0 0 0 0 I I 2 0 0 I 0 8
ESP 0 I 9 1 1 0 0 0 14 0 0 3 10 0 3 18 0 0 0 60
FIN 2 0 0 0 2 0 0 0 I 2 0 0 0 0 0 0 I 21 0 29
FRA 2 16 9 6 20 1 18 I 0 6 0 5 0 0 24 1 8 0 2 119
GBR 2 3 3 3 23 1 II 3 23 12 5 4 3 7 8 3 5 12 39 170
HKG 0 0 0 I 1 0 0 0 0 2 0 0 0 5 0 0 17 0 0 26
1ND 0 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 3
IRL 0 0 0 1 5 0 0 0 I 0 0 0 0 0 0 I 0 2 0 10
ITA 4 1 4 3 21 0 13 0 16 0 0 0 0 0 2 0 I 0 0 65
lPN 0 3 3 0 3 0 0 0 4 6 0 1 0 4 0 0 4 2 I 31
MEX 0 0 8 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 8
MYS 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 12 0 0 12
NLD 2 5 5 2 14 0 2 0 7 6 0 3 0 0 0 2 I 2 3 54
NOR 1 2 3 0 0 5 0 I 0 0 0 0 0 0 0 0 I 18 0 31
PRT 0 0 17 0 1 0 14 0 0 0 0 0 0 0 0 0 0 0 0 32
SGP 0 0 0 1 0 0 0 0 0 5 0 0 0 15 0 0 0 0 0 21
SWE 0 0 4 1 10 7 0 16 4 7 0 0 0 0 2 0 0 0 2 53
ZAF 1 0 0 0 0 0 I 0 I 0 0 0 0 0 0 0 0 0 0 3
Total 28 39 68 45 154 16 82 29 137 61 12 40 l7 37 52 33 55 78 54 1,037
.j::>.
V1
Table 3 (continued)
Panel B: Cross-Country Sample
C/l E-
-l Z r.LI ~ ~ 0- Z ~ cG 0 -l <C Z C/l 0 cG -l E- r.LI [.l... ~~ ~ r.LI <C ::r: r.LI Z C/l >-< CO ~ cG E- o... >- -l 0 N cG ~ <C "0
<C <C co U U 0 0 r.LI [.l... [.l... 0 ::r: - - -, 2 Z Z Z 0... C/l N E-
AUS 0 0 0 2 0 I 2 0 0 0 15 6 0 0 0 0 0 0 31 I 0 0 58
AUT 1 0 I 0 0 6 0 0 0 0 2 0 0 1 0 0 0 0 0 0 0 0 II
BEL 0 0 0 0 0 0 0 0 0 3 4 1 0 1 3 0 2 0 0 0 0 0 14
BRA 0 0 0 3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3
CAN 34 0 0 0 0 0 0 0 0 0 5 2 0 0 1 0 0 4 I 0 0 I 48
CHE 5 0 0 4 0 14 0 0 0 1 12 2 2 4 2 0 2 I 0 0 I 0 50
DEU 12 5 I 2 12 0 0 2 0 7 20 2 I 12 2 0 0 I 0 0 0 0 79
DNK I 0 0 I 0 I 0 0 0 0 3 0 0 0 0 I 0 I 0 0 0 0 8
ESP 2 0 0 0 0 I 0 0 0 2 9 I 0 I 0 0 0 2 0 6 0 0 24
FIN 0 0 0 I 0 0 0 0 0 0 I 0 0 0 I 0 0 2 0 0 0 0 5
FRA 4 0 5 5 4 8 0 3 1 0 23 3 0 5 7 0 12 3 2 0 0 0 85
GBR 67 2 2 19 2 5 0 4 2 4 0 7 0 4 13 2 2 2 7 I 1 7 153
HKG 7 0 0 0 I 1 0 0 0 0 6 0 0 0 3 I 0 0 0 0 0 0 19
IND 0 0 0 0 0 0 0 0 0 0 I 1 0 0 0 0 0 2 0 0 0 0 4
IRL 3 0 0 I 0 0 0 0 0 0 16 1 0 0 0 0 0 0 0 0 0 0 21
ITA 4 4 0 1 3 16 0 2 0 2 9 2 0 0 0 0 0 0 0 0 0 0 43
lPN 8 0 0 2 0 0 0 0 0 2 7 15 0 I 0 0 0 0 0 0 0 0 35
MEX I 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 I
MYS 7 0 0 0 0 0 0 0 0 0 3 3 0 0 0 0 0 0 0 0 0 0 13
NLD 3 I 0 3 2 2 0 0 0 0 7 I 0 1 0 0 0 2 I I 0 0 24
NOR 0 I 0 2 0 0 I 0 0 0 I 0 0 0 0 0 0 0 I 0 0 0 6
NZL 12 0 0 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 0 0 0 0 14
PRT 0 0 0 0 0 0 0 I 0 0 0 0 0 0 0 0 0 0 0 0 0 0 I
SGP 5 0 0 0 I 0 0 0 0 0 I 11 0 0 0 0 0 0 2 0 0 0 20
SWE 1 0 0 I I I I 0 I 0 5 0 0 0 3 0 0 10 0 0 0 0 24
ZAF 25 0 0 2 0 0 0 0 0 0 12 0 0 0 0 0 0 0 0 0 0 0 39
Total 202 13 9 49 26 56 4 12 4 21 164 58 3 30 35 4 18 30 45 9 2 8 802
..".
0\
Table 4
Spearman Rank-Order (Upper) and Pearson's Product Moment (Lower) Correlation Matrix
Panel A: Within-Country Sample
~ ~
V] ~~ ~
-~ :": ~ ~~ ~ :;:: ~ ~;:; ~ ~ ·2 .!::1 \:s .;2'- ~ .~~ E: 2 c:s ..... V:l ;,... ..... ~ ~ ~'J ..... '"~ ..... ~ ~ ~ :;::: ~~ ~ ~ ~ ~ \:s ..... ...s;::: 4:: ..... ..... .....~ ..... :;:: '" 'J '" <:::l <:::la :;::'-- '-- ;,... ~ ~ a c:s a ~ ;,... ~:;:: :;:: :;:: :;:: ~ U u &5 &5-... -... -... -...
(1 ) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11 ) (12) (13)
(1) 0.384 0.165 0.157 -0.099 0.159 0.052 0.164 -0.174 0.073 0.042 0.024 0.190
(2) 0.749 0.051 0.080 -0.010 -0.056 0.161 0.138 -0.008 -0.021 0.055 -0.077 -0.013
(3) 0.256 0.220 0.928 -0.018 0.233 0.039 -0.048 -0.169 0.187 -0.081 -0.003 -0.127
(4) 0.097 0.119 0.971 0.005 0.122 0.099 0.028 -0.103 0.110 -0.003 -0.074 -0.032
(5) 0.037 0.036 -0.023 -0.007 -0.139 -0.019 -0.022 0.104 0.027 0.024 0.077 -0.323
(6) 0.100 0.017 0.309 0.169 -0.139 -0.071 -0.003 -0.191 0.114 0.036 0.328 0.249
(7) -0.148 0.056 0.045 0.094 -0.024 -0.056 0.087 0.129 0.033 0.129 -0.079 -0.027
(8) 0.036 0.049 -0.027 0.012 -0.008 -0.002 0.087 0.045 -0.032 0.130 -0.025 0.013
(9)
-0.056 0.016 -0.174 -0.091 0.103 -0.189 0.129 0.045 -0.482 -0.026 -0.064 -0.068
(10) 0.017 0.016 0.195 0.110 0.031 0.105 0.033 -0.032 -0.482 -0.026 -0.002 -0.024
(11) 0.010 0.023 -0.043 -0.016 0.024 0.036 0.129 0.130 -0.026 -0.026 -0.020 0.005
(12) 0.113 -0.002 0.016 -0.123 0.069 0.349 -0.079 -0.025 -0.064 -0.002 -0.020 0.047
(13) 0.051 0.011 -0.164 -0.069 -0.306 0.248 -0.027 0.013 -0.068 -0.024 0.005 0.047
.j::>.
--.)
Table 4 (continued)
Panel B: Cross-Country Sample
~ f-.22 O(j;;: CD ....; :--.~ N '\:.i Q ~;:: .8 5 CD '- .~B '- "- ';;:; :2 ~CD '-l"- CD CD CD CD -Ie: CD0{) '\:.i '- ..s::: C:l '-~ ~ '- ;;: '-l \::;a "- ;;:
"" """- t2 ~ a \::; a ~ "- "-;;: ;;: 0..., \..) \..) '- '- '--... -... CrJ CrJ CrJ
In (L1II) 0.443 0.027 0.051 0.105 0.080 0.041 0.018 0.155 -0.032 0.052
In(Premium) 0.120 0.212 -0.037 0.301 0.200 -0.087 0.081 0.077 -0.053 -0.054
Protection -0.015 0.071 -0.200 0.139 0.110 0.120 -0.005 0.056 -0.684 -0.754
TargetSize 0.078 0.032 -0.307 -0.009 0.025 -0.074 -0.012 0.034 0.423 0.322
Tender 0.046 0.165 0.058 0.012 0.214 -0.025 0.144 0.208 -0.057 -0.046
Contested 0.020 0.134 0.095 0.004 0.214 0.058 -0.021 0.168 -0.058 -0.058
Cash 0.050 -0.014 0.153 -0.081 -0.025 0.058 -0.454 0.034 -0.175 -0.144
Stock -0.031 0.007 -0.00 I -0.010 0.144 -0.021 -0.454 0.002 0.021 0.027
Hostile 0.024 0.044 0.060 0.034 0.208 0.168 0.034 0.002 -0.033 -0.045
StrategicxlJsr 0.142 -0.050 -0.844 0.453 -0.057 -0.058 -0.175 0.021 -0.033 1.000
Strategicl/·/ls 0.015 -0.037 -0.924 0.325 -0.046 -0.058 -0.144 0.027 -0.045 1.000
.j::>.
00
49
Table 5 summarizes the number of transactions with complete data to test each
hypothesis. Panel A summarizes the observations for the within-country analyses by
strategy type. As reported in panel A of Table 3, 1,037 transactions involve target firms
in countries with weak regulatory environments. However, as shown in panel A of Table
5, only 103 transactions had the necessary information to determine the cross-listing
status and compute the total synergy gains. This difference in the number of observations
is driven primarily by a lack of available data in SDC on the acquiring firm's market
value of equity at the announcement date and four weeks preceding the announcement.
As reported in panel A of Table 5, 103 (162) observations have complete data to test the
first part of hypothesis la (2a). Of these observations, 9 (38) transactions involved a
target firm with cross-listed stock (voluntarily adopted IFRS).
Hypotheses 3 and 4 compare the total synergy gains and merger premia for
strategic target firms from weak regulatory environments to target fIrms from strong
regulatory environments. Panel B of Table 5 summarizes the observations for the cross-
country analyses by strategy type. Of the 143 (380) transactions with complete data to
analyze the merger premium, 18 (73) of those transactions involved a target firm with
cross-listed stock (voluntarily adopted IFRS). Again, the data available from acquirers to
compute the total synergy gains significantly limits the sample size.
50
Table 5
Observations with Available Data by Sample
Panel A: Within Country Sample
9
18
11
In(!J.JI)
In (Premium)
In (Total!J. Vr)
Full
Sample
103
193
131
Cross-Listing
Not Cross-Listed
Cross- Listed
94
175
120
Full
Sample
162
398
433
IFRS
Local
GAAP
124
325
365
IFRS
38
73
68
Panel B: Cross-Country Sample
Cross-Listing
In (!J.JI)
In (Premium)
Full
Sample
88
143
Traditional
79
125
Cross-Li sted
9
18
Full
Sample
175
380
IFRS
Traditional
137
307
IFRS
38
73
Table 6 provides summary statistics for each sub-sample analyzed. In my
regression analyses, I compute the natural log of each dependent variable to control for
heteroskedasticity.22 Panel A provides summary statistics for firms with information
available to determine cross-listing status. Three sub-samples are shown based on the
dependent variable used in the analysis. As shown in panel A, the mean of In(IJII),
In(Premium), and In(Total.1VT) are 4.625,4.716, and 4.419, respectively. In all three sub-
samples over 80% of the targets are acquired with cash. The percent of target firms that
are cross-listed (i.e., StrategicxLIsF1), ranges between 8.4% and 9.3%. A t-test of
22 As in prior research, 1 restrict the dependent variab les to be greater than -100 and less than 100 to contro I
for outliers. Since the dependent variables are not bound to be greater than zero, 1 add 100 to each
observation before 1compute the natural log of each dependent variable. Before these transformations, the
mean oL1II, Premium, and Total,1Vr is 4.51, 17.72, and 0.89, respectively. Thus, the average merger
premium is 17.72%
51
differences in means suggests there is not a significant difference between the strategic
and non-strategic firms for any of the dependent variab1es.23
Panel B of Table 6 reports similar findings to panel A with a few minor
exceptions. First, a relatively lower (higher) percentage of acquisitions are paid for with
cash (stock). Additionally, more firms are identified as strategic in panel B. Specifically,
the percent of target firms that adopted IFRS (i.e., StrategiCJFRS=1), ranges between
15.7% and 23.5%. In panel B, a t-test of differences in means suggests there is not a
significant difference in merger premia between the strategic and non-strategic firms.
However, in contrast to panel A, the univariate evidence suggests that the total valuation
gains for strategic firms are lower than the total valuation gains for non-strategic firms,
contrary to hypothesis 2b.
Panels C and D of Table 6 report descriptive statistics for the cross-country
sample. In panel C, the mean of In (,1ll) and In(Premium) are 4.594 and 4.729,
respectively. The percent of target firms that are cross-listed (i.e., Strategic,rusF1),
ranges between 10.2% and 12.6%. A t-test of differences in means suggests there is not a
significant difference between the strategic and traditional firms for either of the
dependent variables.
Panel D reports similar results to panel C with a few minor differences. First,
stock offers are more prevalent in this group of acquisitions and encompass 10.3% to
11.6% of the sample. As in the within-country sample, there is a higher frequency of
strategic firms in panel D than in panel C. Specifically, between 19.2% and 21.7%
23 Two-sided p-values are reported.
52
percent of target firms adopted IFRS (i.e., StrategicIFRs=I). However, as in panel C, a t-
test of differences in means suggests there is not a significant difference between the
strategic and traditional firms for either of the dependent variables. Thus, there is a lack
of univariate evidence to support any of the hypotheses.
Table 7 presents the within country results.24 Panel A provides results for
hypotheses 1a. Hypothesis 1a predicts that the total synergy gains and merger premium
will be lower for cross-listed firms relative to firms that are not cross-listed. The results in
columns (1) and (2) of panel A are inconsistent with this hypothesis. Specifically, for
both dependent variables, the coefficient on Strategic (i.e., StrategicxLfsrl) is not
significantly different from zero. Thus, hypotheses la is not supported.2s
In column (l) of Table 7, Protection is negative and significant (coefficient -
0.057, t-stat 2.08). A similar result appears in column (2) (coefficient -0.050, t-stat 1.66).
This finding suggests that for target firms from countries with weak regulatory
environments, those firms that have stronger shareholder protection earn lower merger
premia. This finding contradicts the main results of Rossi and Volpin (2004). It is
important to note that when they control for target firms from the United State and United
Kingdom, the coefficient on their shareholder protection is negative and insignificant.
Thus, one reason for the above finding is that while all of my analyses exclude U.S
targets, the within-country analysis also excludes U.K targets.
24 All variables are defined in Table 2. t-statistics based on robust standard errors are shown in parentheses.
*** p<O.OI, ** p<0.05, * p<O.1 indicate significance at 1% percent, 5%, and 10% levels, respectively.
25 Hostile is excluded from column (I) and Contested is excluded from columns (I) and (2) because there
were no transactions for this group of observations involving these types of bids.
53
Table 6
Summary Statistics
Panel A: Within Country Comparison (Cross-listed versus Not Cross-listed)
Analysis of Total Synergy Gains (N=J03)
Mean SD Min 1% 5% 50% 95% 99% Max
In (fJ.II) 4.63 0.29 2.00 4.09 4.49 4.64 4.82 5.14 5.14
Protection 2.15 0.94 0.00 0.00 0.54 2.08 3.43 3.43 3.43
TargetSize 6.55 2.18 1.70 1.70 3.17 6.37 10.19 10.9 10.91
Tender 47.57
Contested N/A
Cash 81.55
Stock 9.71
Hostile N/A
StrategicXLIST 8.74
Analysis of Merger Premia (N=J93)
Mean SD Min 1% 5% 50% 95% 99% Max
In (Premium) 4.72 0.40 1.64 2.10 4.25 4.74 5.17 5.26 5.28
Protection 2.15 0.91 0.00 0.00 0.83 2.08 3.43 3.43 3.43
TargetSize 6.43 2.13 1.70 1.70 3.17 6.09 9.81 10.90 10.91
Tender 43.52
Contested N/A
Cash 81.35
Stock 10.88
Hostile 1.04
StrategicxusT 9.33
Analysis of Total Valuation Gains (N=J3J)
Mean SD Min 1% 5% 50% 95% 99% Max
In (To ta1fJ. Vl):US7) 4.42 0.93 -3.58 0.85 3.52 4.58 5.18 5.27 5.29
Protection 2.25 0.84 0.00 0.00 0.83 2.21 3.43 3.43 3.43
TargetSize 5.89 2.21 -0.69 1.70 2.16 5.61 9.46 10.90 10.91
Tender 38.93
Contested 0.76
Cash 88.55
Stock 6.11
Hostile 0.76
StrategicxusT 8.40
Tests o/Differences in Means ofDependent Variables
Strategic Non-Strategic t-statistic p-value
In(fJ.II)
In (Premium)
In (TotalfJ. V7XUS7)
(N=9) 4.63 (N=94) 4.61
(N=J8) 4.72 (N=J75) 4.72
(N=J J) 4.68 (N= J2 0) 4.39
0.11
-0.02
-0.98
0.92
0.99
0.33
54
Table 6 (continued)
Panel B: Within Country Comparison (Voluntarily Adopted IFRS versus Local GAAP)
Analysis of Total Synergy Gains (N=162)
In (t1II)
Protection
TargetSize
Tender
Contested
Cash
Stock
Hostile
StrategicIFl~)
Mean SD Min
4.62 0.41 0.47
2.12 0.97 0.00
6.43 2.08 1.09
51.85
2.47
79.63
11.11
1.24
23.46
1%
2.00
0.00
1.70
5%
4.49
0.00
3.17
50%
4.65
2.08
6.30
95%
4.83
3.42
9.81
99%
5.14
3.43
10.90
Max
5.14
3.43
10.91
Analysis of Merger Premia (N=398)
Mean SD Min 1% 5% 50% 95% 99% Max
In (Premium) 4.77 0.33 1.64 3.32 4.42 4.79 5.18 5.26 5.28
Protection 2.15 0.95 0.00 0.00 0.00 2.21 3.43 3.43 3.43
TargetSize 6.44 2.00 1.33 1.70 3.13 6.37 9.58 10.64 10.91
Tender 50.50
Contested 1.26
Cash 75.38
Stock 16.58
Hostile 1.01
StralegicllRs 18.34
Analysis of Total Valuation Gains (N=433)
Mean SD Min 1% 5% 50% 95% 99% Max
In (Totalt1 Vmx0 4.10 0.87 -3.86 1.65 2.60 4.28 5.13 5.26 5.29
Protection 2.20 0.93 0.00 0.00 0.00 2.21 3.43 3.43 3.43
TargetSize 6.23 2.02 -0.69 1.89 3.07 6.01 9.47 10.60 10.91
Tender 46.42
Contested 1.62
Cash 80.37
Stock 12.70
Hostile 1.16
StrategicIFR) 15.70
Tests ofDifferences in Means ofDependent Variables
Strategic Non-Strategic t-statistic p-value
In (t1II)
In (Premium)
In (Totalt1VnFR.0
(N=38) 4.71 (N=124) 4.59
(N=73) 4.79 (N=325) 4.76
(N=68) 3.92 (N=365) 4.13
-1.62
-0.63
1.88
0.11
0.53
0.06
55
Table 6 (continued)
Panel C: Cross-Country Comparison (Cross-listed versus Traditional)
Analysis of Total Synergy Gains (N=88)
Mean SD Min 1% 5% 50% 95% 99% Max
In(iJ.II)
Protection
TargetSize
Tender
Contested
Cash
Stock
Hostile
StrategicXLlST
4.59 0.53 0.25
3.90 0.85 0.00
5.96 2.44 0.65
37.50
4.55
79.55
7.96
1.14
10.23
0.25
0.00
0.65
4.40
2.61
2.22
4.68
4.00
5.42
4.89
5.00
10.26
5.10
5.00
10.91
5.10
5.00
10.91
Analysis of Merger Premia (N=143)
Mean SD Min 1% 5% 50% 95% 99% Max
In (Premium)
Protection
TargetSize
Tender
Contested
Cash
Stock
Hostile
Strategic.rusT
4.73 0.31
3.86 0.75
6.19 2.31
27.27
4.20
86.71
4.90
1.40
12.59
2.09
0.00
0.65
4.13
0.00
1.04
4.38
2.61
2.64
4.73
4.00
5.85
5.14
4.28
9.92
5.20
5.00
10.90
5.28
5.00
10.91
Tests ofDifferences in Means ofDependent Variables
Strategic Traditional
In (iJ.II) (N=9) 4.61 (N=79) 4.59
In (Premium) (N=J8) 4.72 (N=J25) 4.73
t-statistic
-0.13
0.17
p-value
0.90
0.86
Panel D: Cross-Country Comparison (Voluntarily Adopted IFRS versus Traditional)
Analysis of Total Synergy Gains (N= J75)
Mean SD Min 1% 5% 50% 95% 99% Max
In(iJ.II)
Protection
TargetSize
Tender
Contested
Cash
Stock
Hostile
Strategicmcs
4.65 0.39 0.25
3.59 1.21 0.00
5.98 2.06 0.65
46.29
5.71
78.29
10.29
2.29
21.71
2.80
0.83
1.75
4.48
0.83
2.78
4.67
4.00
5.68
4.90
5.00
9.56
5.14
5.00
10.37
5.22
5.00
10.64
56
Table 6 (continued)
Analysis of Merger Premia (N=380)
Mean SD Min 1% 5% 50% 95% 99% Max
In (Premium)
Protection
TargetSize
Tender
Contested
Cash
Stock
Hostile
Strategic/FilS
4.79 0.28
3.64 1.11
6.17 1.99
44.47
5.00
77.63
11.58
2.63
19.21
2.09
0.00
0.65
3.57
0.83
1.85
4.46
0.92
3.01
4.80
4.00
6.05
5.15
5.00
9.56
5.26
5.00
10.37
5.28
5.00
10.64
Tests ofDifferences in Means ofDependent Variables
Strategic Traditional
In (iJII) (N=38) 4.71 (N=137) 4.63
In (Premium) (N=73) 4.79 (N=307) 4.79
t-statistic
-1.14
0.05
p-value
0.26
0.96
In Table 7, only two other control variables are significant in column (2). Cash is
negative and significant (coefficient -0.147, t-stat 1.69) suggesting that merger premia are
lower when the acquirer uses cash as the method of payment. Hostile is positive and
significant (coefficient 0.314, t-stat 6.43) which suggests that target firms involved in
hostile takeovers earn higher merger premia.26 One reason for the lack of significance on
many of the control variables in Table 7 is that there is insufficient variation in these
variables across the observations. For example, cash acquisitions constitute a majority of
the acquisitions. The size of the sample, particularly in column (l), also limits the power
of my tests.
26 Schwert (2000) finds mixed evidence of a relation between hostile acquisitions and merger premia using
several different definitions of hostile takeover. However, it is important to note that when hostile is
defined using the definition in SDC, he finds higher merger premia for hostile bids.
57
Hypothesis 2a predicts that the total synergy gains and the merger premium will
be lower for firms that have voluntarily adopted IFRS relative to firms that have not
voluntarily adopted IFRS. The results in columns (3) and (4) of panel A are inconsistent
with this hypothesis. Specifically, when the dependent variable is the total synergy gains,
In(i1II), the coefficient on Strategic (i.e., StrategicIFRs=1) is positive and significant
(coefficient 0.107, t-stat 1.90). However, when the dependent variable is In(Premium) the
coefficient on Strategic is not significantly different from zero (coefficient 0.023, t-stat
0.63). It is important to note that when In(i1II) is the dependent variable, the coefficient
on Strategic is positive and significant, but the coefficient on Strategic is insignificant
when In(Premium) is the dependent variable. Taken together, these results suggest that
acquirers earn higher gains from acquisitions of strategic firms.
Hypotheses 1band 2b predict higher total valuation gains for strategic firms
relative to non-strategic firms. The results are reported in panel B of Table 7. In columns
(1) through (3), the dependent variable is In(Totali1VTXLIsd.27 The results in the first two
columns of panel B do not support hypothesis 1b, as the coefficient on Strategic is not
significantly different from zero. However, when I examine a potentially more powerful
setting of only acquisitions involving target firms in countries with positive cross-listing
premia (as reported in Doidge et al. 2004), I find some support for hypothesis 1b.
Specifically, when I restrict the sample in this manner, the coefficient on Strategic (i.e.,
StrategicxLIsr=l) is positive and significant (coefficient 0.222, t-stat 1.94). Thus, there is
27 Note that Doidge et al. (2004) require that their sample include only non-financial firms. Thus, I exclude
non-financial firms from tests where the dependent variable is In(Totalt1V1XlJs7).
58
evidence that the total valuation gains to cross-listed firms (i.e., the cross-listing premium
plus the merger premium) are higher relative to firms that are not cross-listed.
The results in panel B of Table 7 are inconsistent with hypothesis 2b. Specifically,
in column (4), the coefficient on Strategic (i.e., StrategiclFRs=I) is not significantly
different from zero. One possible explanation for this result is that the firms in my sample
are not "serious" IFRS adopters (Daske et al. 2008). That is, these firms do not
significantly change their financial reporting and the quality of their financial disclosures
does not improve after adopting IFRS. Taken together with the results in panel A of
Table 7, one interpretation of these findings is that there are potential synergy gains to the
acquiring firm by acquiring a target firm using IFRS, possibly because it is easier to
integrate a company using IFRS into the acquirer's existing accounting system.
Table 8 reports the results of tests of hypotheses 3 and 4. These hypotheses
predict that the total synergy gains and the merger premium will be higher for strategic
firms from weak regulatory environments relative to firms from strong regulatory
environments. For cross-listed firms, the results in columns (1) and (2) are not consistent
with hypothesis 3. Specifically, the coefficients on Strategic (i.e., StrategicxLlsF1) are
not significantly different from zero (coefficient -0.039, t-stat 0.27 and coefficient 0.013,
t-stat 0.15, respectively). I also find that the coefficients on Strategic (i.e.,
StrategiC1FRs=1) in columns (3) and (4) are not significantly different from zero
(coefficient 0.100, t-stat 1.21 and coefficient 0.129, t-stat 1.57, respectively). Thus,
hypothesis 4 is not supported.
Table 7
Within Country Comparison
59
Panel A: Tests of Total Synergy Gains and Merger Premium
Sample Cross-Listing IFRS
Dependent Variable In (L1II) In (Premium) In (L1II) In (Premium)
Prediction (1) (2) (3) (4)
Strategic (-) 0.045 0.073 0.107* 0.023
(0.31 ) (0.76) (1.90) (0.63)
Protection -0.057** -0.050* -0.018 -0.011
(2.08) (1.66) (1.18) (0.76)
TargetSize -0.025 -0.022 -0.010 -0.006
(0.71) (0.82) (0.59) (0.46)
Tender -0.059 0.046 -0.085 0.065*
(0.88) (0.68) (1.24) (1.87)
Contested 0.215*** 0.233***
(2.88) (6.31 )
Cash -0.146 -0.147* -0.129* -0.046
(1.45) (1.69) (1.75) (0.82)
Stock -0.083 -0.141 -0.032 -0.056
(1.12) (1.54) (0.61) (0.96)
Hostile 0.314*** -0.089 0.024
(6.43) (1.12) (0.23)
Constant 5.064*** 5.070*** 4.840*** 4.834***
(14.16) (18.37) (30.56) (37.73)
Observations 103 193 162 398
R-squared 0.05 0.04 0.04 0.02
Panel B: Tests of Total Valuation Gains
Dependent Variable In (TotalL1 VD\LIS1) In (TotalL1V1JFR..,)
Full 1995-1999 Cross-Listi ng Full
Sample Premium>O Sample
Prediction (1) (2) (3) (4)
Strategic (+) -0.041 -1.090 0.222* -0.260
(0.23) (1.04) (1.94) (1.33)
Protection 0.101 -0.075 0.163** 0.031
(1.53 ) (0.26) (2.19) (0.70)
TargetSize 0.128* 0.449 0.129 0.051
(1.77) (1.29) (1.30) (1.43 )
Tender 0.304 0.618 0.290 0.168*
(1.63) (0.66) (1.20) (1.90)
Contested -0.093 0.232 0.386
(1.07) (0.47) (1.12)
60
Table 7 (continued)
Cash -0.192 -0.456 -0.173 0.134
(1.41) (0.78) (1.24) (0.73)
Stock 0.205 -0.068 0.156
(0.70) (0.19) (0.71)
Hostile -0.932*** -0.964*** -0.052
(4.03) (3.50) (0.12)
Constant 3.487*** 1.607 3.363*** 3.545***
(5.42) (0.52) (4.00) (11.25)
Observations 131 29 86 433
R-squared 0.10 0.29 0.09 0.03
There are several potential explanations for the lack of evidence supporting my
hypotheses. First, it is possible that multicollinearity confounds my tests. However, an
analysis of the correlation matrix in Table 4 and an analysis of variance inflation factors
(untabulated) suggests that this is not the case. Another possible explanation is that the
power of my tests is low. The evidence in columns (3) and (4) of Table 8 suggests that
this could be a valid concern. Specifically, in columns (3) and (4), many of the
coefficients on my variable of interest, Strategic, are in the predicted direction.
One final explanation for the lack of evidence supporting my hypotheses is that
the models most commonly used in prior research are not valid for my sample of firms.
Most prior research on cross-border acquisitions relies on models developed to explain
synergy gains and merger premia in domestic mergers and acquisitions. Thus, the implicit
assumption is that such models are valid in cross-border mergers and acquisitions. An
examination of prior research in this area suggests that such an assumption might not be
valid.
61
Table 8
Cross-Country Comparison
Panel A: Tests of Total Synergy Gains and Merger Premium
Sample Cross-Listing IFRS
Dependent Variable In(LJ.II) In (Premium) In(LJ.II) In (Premium)
Prediction (1) (2) (3 ) (4)
Strategic (+) -0.039 0.013 0.100 0.129
(0.27) (0.15) (1.21 ) (1.57)
Protection 0.063 0.033 0.023 0.056**
(1.44 ) (0.88) (0.78) (2.04)
TargetSize 0.043 0.012 0.025 0.012
(0.94) (0.89) (1.08) (1.32)
Tender 0.140** 0.092 0.067 0.073**
(2.14) (1.19) (1.56) (2.24)
Contested 0.108 0.162* 0.062 0.167***
(0.85) (1.79) (0.92) (4.03)
Cash -0.002 -0.031 0.019 0.014
(0.04) (0.58) (0.64) (0.33)
Stock 0.012 -0.318 0.043 0.013
(0.08) (0.85) (0.79) (0.16)
Hostile -0.257 0.044 -0.009 0.015
(1.00) (0.44) (0.09) (0.31 )
Constant 4.045*** 4.539*** 4.337*** 4.438***
(8.39) (26.32) (16.13) (29.73)
Observations 88 143 175 380
R-squared 0.05 0.10 0.04 0.06
For example, Rossi and Volpin (2004) use a sample of domestic and cross-border
acquisitions. Thus, even though they find that many of their control variables are
statistically significant, this could be driven by the domestic acquisitions in their sample.
Furthermore, the R2 in their regressions are relatively low, ranging from 0.03 to 0.06.
Additionally, the results of Starks and Wei (2004) indicate that several control variables
such as those for size, hostile bids, and cash bids are not statistically significant. 28 Taken
28 Bris and Cabolis (2008) only indicate whether or not certain control variables are included in the model
and do not provide the coefficient or significance level for these variables.
62
together with the results of my study, this suggests that the most commonly used models
to explain the determinants of the size and distribution of synergy gains in domestic
acquisitions may not perform as well in cross-border settings.
63
CHAPTER VI
SENSITIVITY ANALSYES
To further examine how cross-country differences in regulatory environments
affect the value and distribution of synergy gains in cross-border mergers and
acquisitions, I conduct additional sensitivity analyses. Each analysis and the results are
discussed below.
Cross-Border Acquisition Experience
The value and distribution of synergy gains between acquiring and target firms
could be affected by whether or not the acquiring firm has experience making cross-
border acquisitions. I explore whether prior cross-border mergers and acquisitions
experience int1uences the value and distribution of synergy gains by repeating my
primary analyses on a sample of acquisitions by inexperienced acquirers. To test the
sensitivity of my results to prior cross-border acquisition experience, I repeat my analyses
and exclude all subsequent acquisitions involving acquiring firms completing more than
one cross-border acquisition during the sample period.
The results from this sensitivity analysis are reported in Table 9 and Table 10. In
general, my results remain unchanged when I repeat my analyses on the sub-sample of
first-time cross-border acquisitions. Specifically, for the within-country analysis reported
panels A and B of Table 9, Strategic is not statistically significant in any of the
specifications. The lack of significance reported on column (3) of panel B suggests that
64
the limited evidence reported in panel B of Table 7 supporting hypothesis 1b seems to be
sensitive to the inclusion of experienced acquirers.
Table 9
Sensitivity to Acquisition Experience: Within Country Comparison
Panel A: Tests o.fTotal Synergy Gains and Merger Premium
Sample Cross-Listing IFRS
Dependent Variable In (!J.IJ) In (Premium) In(!J.IJ) In (Premium)
(1) (2) (3) (4)
Strategic 0.006 0.072 0.006 0.015
(0.13) (1.3 8) (0.16) (0.37)
Protection -0.042** -0.007 -0.035 0.006
(2.06) (0.22) (1.43) (0.33)
TargetSize 0.011 0.011 0.010 0.013
(1.22) (0.54) (1.39) (1.04)
Tender 0.022 0.228*** 0.009 0.159***
(0.70) (3.45) (0.33) (4.09)
Contested 0.164** 0.237***
(2.23) (5.03)
Cash -0.049 -0.084 -0.033 0.010
(1.03 ) (0.97) (1.12) (0.17)
Stock -0.018 -0.231 0.016 -0.101
(0.34) (1.53 ) (0.45) (1.35)
Hostile 0.247*** -0.066 -0.143**
(3.87) (1.36) (2.17)
Constant 4.709*** 4.687*** 4.689*** 4.618***
(51.24) (21.48) (53.30) (37.08)
Observations 56 100 86 232
R-squared 0.20 0.18 0.21 0.12
65
Table 9 (continued)
Panel B: Tests of Total Valuation Gains
Dependent Variable In (To talfj VrxusJ) In (Totalfj Vmll..,)
Full Cross- Listing Full
Sample 1995-1999 Premium>O Sample
(1) (2) (3) (4)
Strategic -0.269 -2.241 0.129 -0.213
(1.07) (1.51 ) (0.68) (0.62)
Protection 0.12] -0.219 0.172 0.001
(1.28) (0.50) (1.39) (0.02)
TargetSize 0.193* 0.733 0.204 0.115**
(1.91 ) (1.68) (1.37) (2.13)
Tender 0.305 0.805 0.107 0.279**
(1.13) (0.63) (0.29) (2.37)
Contested -0.165 -0.002 0.645***
(1.38) (0.00) (2.71 )
Cash -0.431 *** -0.324* 0.210
(3.07) (1.78) (0.83 )
Stock 0.103 -0.111 0.124
(0.26) (0.21 ) (0.43)
Hostile -0.432
(0.64)
Constant 3.375*** -0.158 3.117*** 3.188***
(4.70) (0.05) (2.83) (8.46)
Observations 75 16 49 247
R-squared 0.15 0.51 0.12 0.09
I repeat the cross-country analyses to further examine how prior cross-border
acquisition experience affects the value and distribution of synergy gains. In Table 10,
when experienced cross-border acquirers are excluded, I find no evidence to support
either hypothesis 3 or 4. The coefficients are in the predicted direction in all models,
suggesting potential issues with the power of the tests. With one exception noted in panel
B of Table 9, these tests are consistent with earlier results. It appears that cross-border
acquisition experience does not affect the value and distribution of synergy gains.
66
Table 10
Sensitivity to Acquisition Experience: Cross-Country Comparison
Panel A: Tests of Total Synergy Gains and Merger Premium
Sample Cross-listing IFRS
Dependent Variable In(L1.II) In (Premium) In (L1.II) In (Premium)
(1) (2) (3) (4)
Strategic 0.078 0.085 0.151 0.155
(0.40) (0.68) (1.28) (1.44)
Protection 0.190 0.030 0.051 0.069*
(1.36) (0.31 ) (1.1 1) (1.73)
TargetSize 0.066 0.007 0.036 0.013
(0.88) (0.48) (0.95) (0.96)
Tender 0.201 * 0.114 0.135* 0.084*
(1.77) (0.92) (1.72) (1.87)
Contested 0.251 *** 0.248** 0.196*** 0.181***
(3.01) (2.09) (2.63) (3.81 )
Cash -0.029 0.007 -0.023 -0.028
(0.41 ) (0.09) (0.47) (0.67)
Stock 0.057 -0.508 0.046 -0.024
(0.25) (0.75) (0.59) (0.25)
Hostile -0.603 -0.164 -0.231 0.000
(1.39) (1.36) (1.47) (0.00)
Constant 3.354*** 4.548*** 4.137*** 4.412***
(3.37) (11.32) (9.52) (22.62)
Observations 57 93 105 239
R-squared 0.09 0.13 0.06 0.07
Relative Differences in Regulatory Environments
Bris and Cabolis (2008) examine how relative differences in shareholder
protection affect abnormal returns to target and acquiring firms in cross-border mergers
and acquisitions. They find significant positive abnormal returns to target firms when the
acquiring firm is from a country with stronger shareholder protection. However, this
result is limited to 100% acquisitions. In addition, they find significant positive abnormal
returns to target firms when the acquiring firm is from a country with more transparent
67
accounting standards. Again, this result is limited to 100% acquisitions and is
additionally sensitive to treatment effects to control for the decision to use cash as the
method of payment.
For acquiring firms, Bris and Cabolis (2008) find no relation between differences
in either shareholder protection or accounting transparency in the acquiring and target
firm countries and abnormal returns to acquiring firms. Interestingly, they find that when
the acquirer is from a more transparent reporting environment, there are negative
abnormal returns to acquirers in acquisitions of more than 50% of the target firm.
To test the sensitivity of my results to relative differences in regulatory
environments between acquiring and target firms, I repeat my analyses by replacing the
level of shareholder protection in the target country, Protection, with the difference in
shareholder protection between the acquiring country and the target country. I denote this
variable Protection(A-T}. When I substitute this variable for Protection my results are
generally unchanged.
Panel A of Table 11 reports the results from this sensitivity analysis for
hypothesis 1a. I find that the coefficient on Strategic is still not significantly different
from zero. It is possible that relative differences in regulatory environments might matter
more when the acquirer is from a stronger regulatory environment. Thus, I include an
indicator variable equal to one of the acquirer is from a country with stronger shareholder
protection than the target and denote this variable BetterProtectionA. I also include an
interaction term between BetterProtectionA and StrategicxLlsT to allow for the possibility
that the value and distribution of synergy gains for strategic firms could differ in
68
acquisitions involving acquirers with relatively stronger regulatory environments. I find
no evidence to support this conjecture. Specifically, the coefficient on StrategiCXL/ST is not
significantly different from zero in any of the specifications.29
Panel B reports the results testing the sensitivity of hypothesis 2a to relative
differences in regulatory environments. Similar to the findings in panel A of Table 7 and
contrary to hypothesis 2a, in column (1), I find a positive relation between strategic firms
and total synergy gains (coefficient 0.120, t-stat 2.23). However, this result appears to be
affected by acquisitions involving acquiring firms from countries with relatively stronger
shareholder protection as the coefficient on StrategiclFRs is insignificant in column (2)
(coefficient 0.174, t-stat 1.54). In columns (3) and (4) of panel B, I find no evidence
supporting the second part of hypothesis 2a. That is, the coefficient on StrategiclFRsis not
significantly different from zero in either specification.
In panels C and D of Table 11, I examine how the total valuation gains are
affected by relative differences in shareholder protection. In panel C, I generally find no
evidence to support hypothesis 1b. The one exception is in column (5) of panel C. When I
restrict the sample to only acquisitions involving target firms from countries with positive
cross-listing premia per Doidge et al. (2004), I find that the total valuation gains are
higher for strategic firms relative to non-strategic firms, consistent with hypothesis 1b
(coefficient 0.298, t-stat 2.01) and earlier results in Table 7. However, this result also
appears to be affected by acquisitions involving acquiring firms from countries with
29 Contested is excluded from the regressions in panel A of Table 11 because there were no transactions for
this group of observations involving multip Ie bidders.
69
relatively stronger shareholder protection as the coefficjent on StrategicxLlsT is
insignificant in column (6) (coefficient 0.692, t-stat 1.42).
In column (l) of panel D, Strategic/FRS is not significantly different from zero.
However, in column (2), I find evidence contrary to hypothesis 2a. Specifically, the
coefficient on Strategic/FRS is negative and significant (coefficient -0.845, t-stat 1.78).
However, the coefficient on the interaction term BetterProtectionA *StrategiclFRS is
positive and significant (coefficient 0.818, t-stat 1.79). Thus, it appears that in
acquisitions involving acquiring firms with relatjvely stronger shareholder protection,
there is limited evidence to suggest that the total valuation gains are higher in acquisitions
of strategic firms.
I repeat the cross-country analyses to further examine how relative differences in
regulatory environments affect the value and distribution of synergy gains. The results
are reported in Table 12. After repeating the analyses, I still do not find evidence to
support either hypothesis 3 or 4. That is, in both panel A and panel B, the coefficient on
Strategic is not significantly different from zero.
Overall, these tests are generally consistent with previously reported results.
Specifically, relative differences in shareholder protection of the acquiring and target
countries do not appear to affect the value and distribution of synergy gains.
Table 11
Sensitivity to Differences in Shareholder Protection: Within Country Comparison
70
Panel A: Tests o.fTotal Synergy Gains and Merger Premium (Cross-listing Sample)
Dependent Variable In(L1.II) In (Premium)
(1) (2) (3) (4 )
StrategicrusT 0.056 0.112 0.058 0.140
(0.35) (0.57) (0.63) (0.90)
Protection (A- T) 0.046 0.030 0.031 0.012
(1.34) (0.61 ) (1.04) (0.28)
TargetSize -0.011 -0.007 -0.013 -0.011
(0.40) (0.22) (0.56) (0.43)
Tender -0.054 -0.060 0.060 0.062
(0.78) (0.81) (0.90) (0.82)
Cash -0.152 -0.135 -0.149 -0.124
(1.41) (1.00) (1.65) (1.13)
Stock -0.092 -0.089 -0.137 -0.103
(1.04) (0.79) (1.44) (0.94)
Hostile 0.257*** 0.286***
(4.42) (4.15)
BetterProtectionA 0.098 0.096
(1.18) (0.65)
BetterProtectionA * Strategicxus7 -0.126 -0.168
(0.83) (1.34)
Constant 4.821 *** 4.712*** 4.881*** 4.782***
(19.48) (15.55) (23.17) (16.75)
Observations 103 97 193 186
R-squared 0.07 0.09 0.04 0.04
Panel B: Tests o.f Total Synergy Gains and Merger Premium (IFRS Sample)
Dependent Variable In (L1.II) In (Premium)
(1) (2) (3) (4)
Strategic/F/I.,s 0.120** 0.174 0.030 0.106
(2.23) (1.54) (0.84) (1.49)
Protection(A-T) 0.006 -0.022 0.009 0.006
(0.22) (0.65) (0.74) (0.30)
TargetSize -0.008 -0.005 -0.005 -0.005
(0.51 ) (0.28) (0.40) (0.36)
Tender -0.083 -0.093 0.067* 0.069*
(1.22) (1.26) (1.92) (1.85)
Contested 0.209*** 0.235*** 0.232*** 0.246***
(2.82) (3.04) (6.38) (6.90)
Cash -0.127* -0.111 -0.045 -0.042
(1.71) (1.33) (0.81) (0.66)
71
Table 11 (continued)
Stock -0.035 -0.015 -0.055 -0.043
(0.64) (0.23) (0.93) (0.65)
Hostile -0.101 -0.115 0.007 0.011
(1.39) (1.34) (0.07) (0.11)
BetterProtectionA 0.133** 0.035
(2.17) (0.43 )
BetterProtectionA * StrategiCIFJiS -0.054 -0.105
(0.47) (1.38)
Constant 4.777*** 4.663*** 4.796*** 4.762***
(35.10) (32.00) (40.45) (33.35)
Observations 162 151 398 372
R-squared 0.04 0.05 0.03 0.03
Panel C: Tests otTotal Valuation Gains (Cross-listing Sample)
Dependent In(Totalt1 VTXLlS7)
Variable
Full Sample Cross-Listing1995-1999 Premium>O
(1) (2) (3) (4) (5) (6)
Strategicxus7 0.014 0.246 -1.035 -0.936 0.298** 0.692
(0.08) (0.84) (1.21 ) (1.00) (2.01) (1.42)
Protection (A-T) 0.075 -0.075 0.313 0.273 0.057 -0.064
(1.16) (1.09) (1.33) (1.01) (0.64) (0.64)
TargetSize 0.123* 0.116* 0.499 0.490 0.115 0.103
(1.70) (1.71) (1.47) (1.54) (1.16) (1.19)
Tender 0.238 0.331 * 0.447 0.472 0.215 0.324
(1.39) (1.70) (0.74) (0.67) (0.95) (1.24)
Contested -0.233 -0.118 -0.319 -0.289
(1.40) (0.91) (0.54) (0.54)
Cash -0.156 -0.057 -0.498 -0.155 -0.234
(0.81 ) (0.21) (0.91 ) (1.06) (0.95)
Stock 0.259 0.466 0.559 0.031 0.144
(0.84) (1.40) (1.56) (0.09) (0.43)
Hostile -0.916*** -0.773** -0.870** -0.917**
(2.98) (2.55) (2.23) (2.35)
BetterProtectionA 0.578 0.143 0.482
(1.45) (0.13) (0.70)
BetterProtectionA -0.321 -0.520
*StrategicXLIST (0.87) (1.00)
Constant 3.676*** 3.273*** 0.511 0.980 3.765*** 3.601 ***
(5.68) (3.86) (0.20) (0.33) (4.42) (3.21 )
Observations 131 125 29 29 86 83
R-squared 0.11 0.14 0.36 0.36 0.08 0.10
Table 11 (continued)
Panel D: Tests of Total Valuation Gains (IFRS Sample)
Dependent Variable In(TotaltJ.VmRs)
(1) (2)
72
StrategiC/FilS
Protection(A-T)
TargetSize
Tender
Contested
Cash
Stock
Hostile
BetterProtectionA
BetterProtectionA* StrategiclI./ls
Constant
Observati ons
R-squared
-0.279
(1.51)
0.032
(1.16)
0.052
(1.43)
0.160*
(1.78)
0.386
(1.14)
0.163
(0.89)
0.179
(0.82)
-0.047
(0.11)
3.566***
(10.54)
433
0.03
-0.845*
(1.78)
-0.008
(0.18)
0.042
(1.11)
0.143
(1.50)
0.335
(1.04)
0.201
(0.97)
0.269
(1.07)
-0.017
(0.04)
0.047
(0.29)
0.818*
(1.79)
3.590***
(9.02)
399
0.06
73
Table 12
Sensitivity to Differences in Shareholder Protection: Cross-Country Comparison
Panel A: Tests o.fTotal Synergy Gains and Merger Premium
Sample Cross-l isting
Dependent Variable In (,111) In(Premium)
(1) (2) (3) (4)
StrategicXLIST -0.173 -0.258 -0.035 -0.055
(1.20) (1.11 ) (0.55) (0.63)
Protection(A-T) -0.008 0.060 -0.006 -0.001
(0.35) (1.38) (0.36) (0.03)
TargetSize 0.043 0.038 0.011 0.017
(0.99) (1.00) (0.79) (1.24)
Tender 0.125** 0.134* 0.085 0.089
(2.13) (1.82) (1.17) (1.07)
Contested 0.118 0.009 0.169* 0.159*
(0.87) (0.07) (1.94) (1.78)
Cash -0.002 -0.064 -0.030 -0.024
(0.05) (0.86) (0.57) (0.43)
Stock 0.007 0.022 -0.319 -0.325
(0.05) (0.10) (0.86) (0.88)
Hostile -0.220 -0.047 0.053 0.045
(0.82) (0.33) (0.58) (0.45)
BetterProtectionA -0.337 0.015
(1.00) (0.17)
BetterProtectionA 0.061 -0.078
*StrategicxLlsr (0.30) (0.76)
Constant 4.300*** 4.546*** 4.674*** 4.640***
(12.48) (24.67) (51.85) (49.75)
Observations 88 75 143 126
R-squared 0.05 0.08 0.09 0.10
74
Table 12 (continued)
Panel B: Tests of Total Synergy Gains and Merger Premium
Sample IFRS
Dependent Variable In (lJ.II) In (Premium)
(1) (2) (3) (4)
Strategicll'Rs 0.037 -0.057 -0.035 -0.055
(0.97) (0.68) (0.55) (0.63)
Protection(A-T) 0.000 0.017 -0.006 -0.001
(0.02) (1.06) (0.36) (0.03)
TargetSize 0.025 0.023 0.011 0.017
( 1.17) (1.34) (0.79) (1.24)
Tender 0.070 0.075 0.085 0.089
( 1.60) (1.43) (1.17) (1.07)
Contested 0.063 0.036 0.169* 0.159*
(0.91) (0.53) (1.94) (1.78)
Cash 0.017 0.029 -0.030 -0.024
(0.56) (0.90) (0.57) (0.43)
Stock 0.040 0.089 -0.319 -0.325
(0.72) (0.89) (0.86) (0.88)
Hostile 0.003 0.016 0.053 0.045
(0.03) (0.22) (0.58) (0.45)
BetterProtectionA -0.139 0.015
(0.76) (0.17)
BetterProtection.,! 0.188 -0.078
* StrategiclFIls (1.01) (0.76)
Constant 4.434*** 4.478*** 4.674*** 4.640***
(25.59) (41.38) (51.85) (49.75)
0.04 0.05 0.09 0.10
Observations 175 157 143 126
R-squared
75
CHAPTER VII
CONCLUSIONS AND FUTURE RESEARCH
In conclusion, I examine how strategies to eliminate valuation discounts due to
regulatory environments of a country affect the total synergy gain and the distribution of
synergy gains between acquirers and targets. My results are subject to several limitations.
One limitation is the size of my sample. Thus, despite testing my hypotheses in a setting
that allows me to exploit cross-country differences in regulatory environments, my tests
could lack power due to the size of the samples. In many cases, there is insufficient data
in SDC on the market values of acquiring firms that are central to my analysis of the total
synergy gains. This is also true to a lesser extent for target firms in the sample.
By examining cross-border mergers and acquisitions, my research provides
evidence on an increasingly important and economically significant type of foreign direct
investment. Although prior research such as Rossi and Volpin (2004) has examined how
cross-country differences in the regulatory environment affect merger premia, little
attention has been given in the literature to actions target firm managers take in advance
of the acquisition to improve transparency and reduce information risk. I examine two
types of strategies managers of firms in countries with weak regulatory environments can
take in advance of an acquisition - cross-listing or adopting IFRS.
In general, I find no evidence that the total synergy gains or the merger premium
are lower for strategic firms. In fact, I find some evidence that in acquisitions of firms
from weak regulatory environments, the total synergy gains are higher for firms that
76
voluntarily adopt IFRS relative to firms using local GAAP. This suggests that acquirers
potentially benefit through easier integration of a target firm using IFRS. Additionally, I
find some evidence that the total valuation gains for cross-listed firms are higher than
firms in weak regulatory environments that are not cross-listed. However, I find no
evidence that either the total synergy gains or the merger premium for target firms from
weak regulatory environments are higher relative to target firms from strong regulatory
environments.
Although the power of my tests could be a confounding factor, another potential
avenue for future research rests in deriving a model separate and distinct from those used
in domestic mergers and acquisitions research. Ideally, such a model will better fit the
value and distribution of synergy gains in cross-border acquisitions. However, if the
merger premium does not differ for strategic firms relative to non-strategic firms, it
suggests that acquirers pay a similar premium, regardless of the type of target acquired.
Exploring this idea further could improve our understanding of how the value and
distribution of synergy gains are determined in cross-border mergers and acquisitions.
77
APPENDIX
CLASSIFICATION OF STRATEGIC FIRMS
In this appendix, I describe methods used to classify observations as strategic
firms, based on a strategy of cross-listing or adopting IFRS. I use data from Worldscope,
supplemented with information from Daske et al. (2007) and Daske et al. (2008). Table
A1 outlines the classification procedures used for strategic firms.
It is important to note that prior research such as Daske et al. (2007) and Daske et
al. (2008) document inconsistencies and errors in Worldscope's classifications of firms'
accounting standards. Daske et al. (2007) and Daske et al. (2008) supplement accounting
standards data obtained from Worldscope with an extensive hand-collected dataset and
find results that are generally consistent across the two samples. Per Daske et al. (2007),
on average, Worldscope classified firms as using IFRS too frequently. To the extent such
a misclassification is present in my sample, I would expect it to bias against my
hypotheses.
Cross-Listing
I use the variable STK_EXCH_LISTED to determine whether a company is cross-
listed on a stock exchange outside of their country of domicile. The variable
STK_EXCH_LISTED is an 80-byte variable where each byte corresponds with a stock
exchange. I match the stock exchanges up with the corresponding countries to determine
whether or not a company is listed on a stock exchange outside of their country of
78
domicile. Using this information, I create a variable StrategicxLlsT set equal to one if the
company has stock listed on a non-domestic stock exchange and zero otherwise.
It is important to note that I use the 2007 version of Worldscope for my analyses.
The STK_EXCH_LISTED variable is updated each year. Ideally, I would be able to
obtain this variable on an annual basis. To the extent a company is acquired or liquidates,
the information in this variable is for the last fiscal-year included in the database.
Therefore, the StrategicxLlsT should be accurate for my sample of target firms.
Adopting IFRS
Consistent with Daske et aI. (2007), I classify firms as using either U.S. GAAP,
IFRS, or local GAAP based on the "Accounting Standards Followed" field in
Worldscope. 3o Also consistent with Daske et aI. (2007), I further classify firm-year
observations into three categories depending on the timing of IFRS adoption.
Specifically, I classify firms as (l) first-time mandatory, (2) early voluntary, and (3) late
voluntary IFRS adopters. As in Daske et aI. (2008) I code the variable Mandatory equal
to one for firm-year observations with fiscal years ending on or after the date a country
required adoption ofIFRS (per Daske et aI., 2008) and zero otherwise. For most
countries, the mandatory adoption date is December 31, 2005.
30 A more detailed explanation ofthe classifications used is provided in Table A 1.
79
Table Al
Classification of Strategic Firms
Panel A: Class(fication ofCross-Listed Firms
StrategicxusT Indicator variable set equal to one if (i) a company is listed on more than one
exchange (i.e., has multiple items in the variable field) and (ii) one of those
exchanges is outside of their country of domicile (i.e., the country the exchange
is located in is not the same as the country of domicile for the firm), and zero
otherwise. Source: Worldscope "Stock Exchange(s) Listed",
Panel B: Class(fication ofAccounting Standards
IFRS Thefollowingfirm-year observations are coded as IFRS:
IFRS
Intemational standards
Intemational standards and some EU guidelines
Local standards with EU and IASC guidelines
Local standards with some IASC guidelines
Source: Worldscope ''Accounting Standards Followed",
U.S. GAAP Thefollowingfirm-year observations are coded as Us. GAAP:
U.S. standards (GAAP)
U.S. standards - inconsistency problems
U.S. GAAP reclassified from local standards
Source: Worldscope "Accounting Standards Fol101ll'ed".
LOCAL Thefollowingfirm-year observations are coded as LOCAL:
Local standards
EU standards
Specific standards set by the group
Not disclosed
Local standards with some EU guidelines
Commonwealth countries standards
Local standards with a certain reclassification for foreign companies
Other
Source: Worldscope "Accounting Standards Followed".
80
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