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Financial market integration and the value of global diversification: Evidence for US acquirers in cross-border mergers and acquisitions

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  • Francis, Bill B.
  • Hasan, Iftekhar
  • Sun, Xian

Abstract

In contrast to the previously documented cross-border discount, we find that there is positive cross-border effect for US acquirers during late 1990s and early 2000s. This is especially particular the case for those that acquire/merge with targets from segmented financial markets where acquirers experience significantly higher positive abnormal returns than those that acquire targets from integrated financial markets. Furthermore, firms acquiring segmented-market targets are also characterized by significantly higher post-merger operating performance improvement. The results indicate that the observed positive cross-border effect is mainly due to the increase in the number of transactions involving targets from segmented markets, in which the average firm experience significant financial constraints. We contend that value is created by a combination of firms with different financial market integration status, in which funds are provided to high cost firms. The finding that the value creation is even higher within the group of acquirers with a lower cost of capital provides additional support for our conjecture.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 32 (2008)
Issue (Month): 8 (August)
Pages: 1522-1540

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Handle: RePEc:eee:jbfina:v:32:y:2008:i:8:p:1522-1540

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Cited by:
  1. Francis, Bill B. & Hasan, Iftekhar & Sun, Xian, 2014. "Does relationship matter? The choice of financial advisors," Journal of Economics and Business, Elsevier, vol. 73(C), pages 22-47.
  2. Madura, Jeff & Ngo, Thanh & Viale, Ariel M., 2011. "Convergent synergies in the global market for corporate control," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2468-2478, September.
  3. Kadish, Peter, 2010. "Are Large Multinational Companies Undervalued? Emerging Markets Perspective," MPRA Paper 24315, University Library of Munich, Germany.
  4. Francis, Bill B. & Hasan, Iftekhar & Sun, Xian & Waisman, Maya, 2014. "Can firms learn by observing? Evidence from cross-border M&As," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 202-215.
  5. von Eije, Henk & Wiegerinck, Hélène, 2010. "Shareholders' reactions to announcements of acquisitions of private firms: Do target and bidder markets make a difference?," International Business Review, Elsevier, vol. 19(4), pages 360-377, August.
  6. Olivier Bertrand & Marie-Ann Betschinger, 2011. "Performance of domestic and cross-border acquisitions: empirical evidence from Russian acquirers," Working Papers 129, European Bank for Reconstruction and Development, Office of the Chief Economist.
  7. Mantecon, Tomas, 2009. "Mitigating risks in cross-border acquisitions," Journal of Banking & Finance, Elsevier, vol. 33(4), pages 640-651, April.
  8. Bhagat, Sanjai & Malhotra, Shavin & Zhu, PengCheng, 2011. "Emerging country cross-border acquisitions: Characteristics, acquirer returns and cross-sectional determinants," Emerging Markets Review, Elsevier, vol. 12(3), pages 250-271, September.
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  10. Finnerty, John D. & Jiao, Jie & Yan, An, 2012. "Convertible securities in merger transactions," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 275-289.
  11. Dos Santos, Marcelo B. & Errunza, Vihang R. & Miller, Darius P., 2008. "Does corporate international diversification destroy value? Evidence from cross-border mergers and acquisitions," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2716-2724, December.
  12. Hamberg, Mattias & Overland, Conny & Lantz, Björn, 2013. "Board participation, toeholds and the cross-border effect," International Business Review, Elsevier, vol. 22(5), pages 868-882.
  13. Deshpande, Shreesh & Svetina, Marko & Zhu, PengCheng, 2012. "Analyst coverage of acquiring firms and value creation in cross-border acquisitions," Journal of Multinational Financial Management, Elsevier, vol. 22(5), pages 212-229.
  14. Jory, Surendranath R. & Madura, Jeff & Ngo, Thanh N., 2012. "Deal structure decision in the global market for divested assets," International Review of Financial Analysis, Elsevier, vol. 24(C), pages 104-116.
  15. Yan, An & Yang, Zaihui & Jiao, Jie, 2010. "Conglomerate investment under various capital market conditions," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 103-115, January.
  16. Feito-Ruiz, Isabel & Menéndez-Requejo, Susana, 2011. "Cross-border Mergers and Acquisitions in different legal environments," International Review of Law and Economics, Elsevier, vol. 31(3), pages 169-187, September.

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