Disentangling invisible hand from visible hand: How does home country economic institution and political institution influence firm’s cross-border acquisitions

Abstract

This article examines how acquirer’s home country institutions influence its ownership choice in cross-border acquisitions. Drawing on the institutional theory, we argue that home country economic institution determines acquirer’s information availability and resource munificence, while home country political institution determines the exogenous policy risks that acquirer face in both domestic and host countries. Accordingly, we propose that acquirers from countries with stronger economic and political institution are more likely to seek high level of equity ownership in foreign targets. Findings from 5502 cross-border deals across 57 home countries provide robust support for our argument. We also show that the positive effect of home country economic institution can be strengthened by acquirer-target business relatedness and host country’s economic dependence on home market; while the positive effect of home country political institution can be strengthened by acquirer’s political capability on the one hand, but weakened by host country’s economic dependence on home market on the other hand. Altogether, our findings support the argument that home country economic and political institution influences are distinct in its mechanisms, which may lead to different results under different contingencies.