Institutional Adaptability: State Corruption and Cross-Border Acquisitions

Abstract

This study proposes that investors’ reactions to cross-border mergers and acquisitions (M&As) hinge on the matching between U.S. acquirers’ headquartered state corruption and foreign targets’ host country corruption. Specifically, we argue that the corruption of states where acquiring U.S. firms are headquartered is positively (negatively) associated with investors’ reactions to cross-border M&A announcements when these firms acquire foreign target firms in corrupt (clean) countries. In addition, the influence of the matching in subnational and host country corruption on investors’ reactions to M&A announcements is contingent on acquirers’ prior financial performance and cross-border M&A experiences in corrupt countries. Using a sample of 3,598 cross-border M&As, we find empirical support for our arguments. Our findings contribute to the sociological perspective on the financial market by highlighting that the matching between subnational and target-country institutions can affect investors’ perceptions of cross-border M&A legitimacy.