Political economy of cross-border mergers and acquisitions

Abstract

This dissertation studies the political economy of cross-border mergers and acquisitions (M&As) from two angles, namely, compatibility of national security interests and political uncertainty around national elections.

Using the presence of military alliance as a proxy for the compatibility of security interests between countries, this study finds that the presence of military alliance between two countries is positively associated with the intensity of cross-border M&A activity. This result is robust to different measures of M&A volume and using colonial contiguity before World War II to instrument for the presence of alliance. The positive effect of military alliance on cross-border M&As is greater when the alliance includes a defense commitment, the allied acquirer country is a major power nation, and the legal environment of the target country is weaker. What’s more, the presence of military alliance reduces the premium offered and increases the probability of a bidder obtaining full control of the target firm. These findings suggest that compatible security interests act as a facilitator in the international market of control by reducing transaction costs associated with cross-border deals.

This study also examines the effect of political uncertainty around national elections on outbound cross-border M&As in 47 countries between 2001 and 2010. The results show that the year before a national election is associated with greater volume of outbound cross-border M&As. An acquisition deal is more likely to be cross-border and increase acquirer’s announcement returns in the year before a national election. Across countries, this relation is stronger in countries with lower checks and balances and lower level of shareholder protection. Within countries, this relation is weaker when elections with high likelihood to reappoint incumbent leader and stronger when a new leader is more likely to win. In addition, firms doing outbound cross-border acquisitions in the year before national election tend to choose targets from different industries with them. These results are consistent with the hypothesis that firms strategically time cross-border acquisitions and diversify political uncertainty abroad before national elections.