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Do Bidding Firms Overpay for Their Targets? A New Evidence from European
Cross-border and Domestic Acquisitions
Conference Paper · January 2015
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Do Bidding Firms Overpay for Their Targets? A New Evidence from European
Cross-border and Domestic Acquisitions*†
This version
December 10, 2014
Abstract
In this paper we investigate whether European mergers and acquisitions create more value to
target than bidder shareholders, and why bidders pay larger premiums in cross-border than in
domestic acquisitions. Using a sample of 275 public acquisitions by large and medium-sized
European firms between 2003 and 2010, we find target shareholders of both domestic and
cross-border acquisitions to earn significantly positive bid premiums, with the target firm
shareholders earning substantially greater premiums in cross-border than in domestic
acquisitions. This effect is more pronounced in stock offers. Our empirical results show that
bidder investors in Europe on average react negatively to the merger announcement of a listed
target firm. In line with previous research we find that shareholders of Continental European
bidders enjoy a positive abnormal value effect whereas shareholders of UK or Irish bidders
suffer small wealth losses. However, target abnormal returns are, on average, significantly
larger for firms located in the UK or Ireland than for targets from Continental European
countries. According to the previous research the differences in bid premiums can be
explained by variations in corporate governance structures. For our sample of European
bidders we do find that bid premiums are larger in cross- border acquisitions when the method
of payment is stock but no evidence of a significant effect of corporate governance measures
on bid premium exists. In contrast, we find that larger premiums paid in European
acquisitions are due to differences in firm and bid characteristics rather than differences in
corporate governance systems. At the same time, differences in corporate governance quality
do explain the larger announcement returns accrued to the target shareholders.
Keywords: mergers and acquisitions, cross-border takeovers, bidder gain, corporate
governance.
JEL classification: F23, G14, G34
*
A paper prepared for the 2015 MFA Annual Conference, March 4-7, 2014, to be held in Chicago, USA.
This research was supported by a grant from the American University in Bulgaria (AUBG) under the Faculty
Research Fund. All opinions expressed are those of the authors and have not been endorsed by AUBG. I thank
the participants at the 5th World finance conference in Venice, Italy for helpful comments and suggestions,
especially Benjamin Hammer (HHL) and C.N.V. Krishnan (Case Western Reserve University).
†
1
1 Introduction
Increased level of mergers and acquisitions (M&As) is one of the most important
developments in corporate finance in the last few decades. Whether M&A creates value for
the shareholders of the acquiring firms has become a very important issue for researchers.
M&As are economically relevant if they promote massive reallocation of resources in a short
period of time, both within and across industries and regions, and potentially leading to wideranging institutional and organizational changes (Ferraz and Hamaguchi, 2002). Therefore
companies use M&A as a tool to gain competitive advantage, to generate efficiency gains,
and also to enhance growth potential. Many researchers argued that international acquisitions
facilitate internalization of tangible and intangible resources that are both difficult to trade
through market transactions and take time to develop internally, thus constituting an
important strategic lever of value creation for both developed and emerging economy firms.
Despite the growing importance of Europe in the worldwide M&A market, empirical
research on the value effects of European acquisitions remains limited to date. In contrast to
the US evidence, European takeovers seem to result in small but positive and significant
acquirer abnormal returns upon deal announcement, even for takeovers of listed companies
(Campa and Hernando, 2004; Craninckx and Huyghebaert, 2011; Martynova and Renneboog,
2011). Nonetheless, Craninckx and Huyghebaert (2011) and Martynova and Renneboog
(2011) point out also that in Europe a considerable fraction of acquisitions fails to create
shareholder value.
In a more recent paper, Craninckx and Huyghebaert (2013) analyze total M&A gains as well
as the division of M&A gains between acquirer and target shareholders for a sample of 342
European takeovers of listed firms between 1997 and 2007, and find that M&A gains are not
split equally between acquirer and target shareholders. This result arises especially for the
deals with a negative combined abnormal return. For the subsample of deals with negative
total M&A gains, acquirers also tend to make more aggressive bid offers.
When two firms merge, there are often takeover gains to be shared between the target and
the bidding firm shareholders. The extent to which these gains are shared depends in part on
the target and bidder shareholders’ expectations regarding the values of their participation in
the combined firm. When the merger is conducted with stock as the method of payment, the
target firm shareholders not only become shareholders of the combined firm, they also
become subject to the corporate governance practices of the new firm, which in the case of a
cross-border merger depend greatly on the home country of the bidding firm. Thus, the end
result of a cross-border merger can be a change in governance structure faced by the target
firm shareholders. In a study of the level of merger activities across countries, Rossi and
Volpin (2004) conclude that targets are primarily acquired by firms from countries with better
investor protection, resulting in improved shareholder protection for these firms. Consistent
with previous findings, they show that the probability of stock offer increases with the degree
of shareholder protection in the acquirer’s home country. More recent papers by Bris and
Cabolis (2008) and Kuipers et al. (2009) examine the relation between merger announcement
abnormal returns and the quality of shareholder protection and legal environment in the
acquiring firm’s home country. They find a negative but statistically insignificant relationship
between target abnormal returns and measures of the acquirer’s home country legal
2
enforcement and shareholder protection, when the acquirer comes from a less protective
country.1
The main purpose of this paper is to examine the main determinants of takeover premiums
paid by European bidders, thereby adding to this relatively new literature on European
M&As. According to the previous research the differences in bid premiums can be explained
by variations in corporate governance structures. To address this issue we investigate the link
between corporate governance practices and bid premiums paid in European transactions
using various proxies for governance/investor protection as developed in the literature so far.
In addition, we distinguish between acquisitions by firms in Continental Europe (CE) and
acquisitions in the UK/Ireland, to explore how the institutional context may affect the
importance of these alternative measures. Numerous authors have pointed out that accounting
standards are better and investor protection is stronger in an Anglo-Saxon setting, while
concentrated ownership is more widespread in Continental Europe where many listed
companies are controlled by families (La Porta et al., 1998, 2002; Faccio and Lang, 2002). In
line with Martynova and Renneboog (2008) we argue that English legal origin countries
provide the highest quality of shareholder protection.2 Finally, we examine the combined
abnormal return of the target and the bidding firm around the deal announcement and whether
the overall value creation increases or decreases with the difference in the quality of corporate
governance systems.
Using a sample of 275 public acquisitions initiated by large and medium-sized European
firms between 2003 and 2010 we address the question if European targets earn higher bid
premiums in cross-border than in domestic acquisitions. If this is the case what cause the
European bidders to pay more to acquire a foreign target? We find target shareholders of both
domestic and cross-border acquisitions to earn significantly positive bid premiums, with the
target firm shareholders earning substantially greater premiums, approximately 5% greater, in
cross-border acquisitions. Analyzing the impact on targets and bidders of cross-border
acquisitions in comparison to companies involved in domestic acquisitions, we find both
targets and bidders to gain more in cross-border than in domestic acquisitions, with target and
bidder shareholder returns of 7.34% and 0.13%, respectively, over a 3-day event window. Our
empirical results show that bidder investors in Europe on average react negatively to the
merger announcement of a listed target firm. Shareholders of the bidding firm achieve
abnormal returns close to, and insignificantly different from zero, amounting to -0.04%, in the
3-day event window surrounding the announcement date. Respectively, the shareholders of
the target firm realize a positive and significant abnormal return of 5.12% on average, in the
same event window. We also find that shareholders of Continental European bidders enjoy an
abnormal value effect of about 0.61%, whereas shareholders of UK or Irish bidders suffer
small wealth losses of -1.43%. Total M&A gains, measured by the combined value effect to
bidder and target investors, equal a positive and significant return of 2.94%, on average. They
are not statistically different across Continental Europe and the UK or Ireland.
1
While Bris and Cabolis (2008) and Kuipers et al. (2009) study target announcement abnormal returns for all
methods of payment, Starks and Wei (2013) highlight that corporate governance differences should matter only
in stock offers because in cash offers target shareholders would not be exposed to different corporate governance
practices as a result of the merger.
2
Danbolt and Maciver (2012) investigate the impact of differences in bidder and target country corporate
governance systems for a sample of 251 targets and 146 bidders into and out of the U.K., and find non-robust
results for English origin and the rule of law. However, they report strong results for the impact of anti-director
rights and the overall level of shareholder protection (which combines the effect of anti-director rights and the
rule of law), with target cross-border effects higher where the bidder country offers shareholders stronger rights
and protection than those in the target country.
3
There are several important contributions of this study. Firstly, we complement the existing
literature on target and bidder announcement effects. Danbolt and Maciver (2012) find that
the overall wealth creation is significantly higher in cross-border acquisitions both into and
out of the UK than in comparable domestic acquisitions, although the gains normally accrue
to target rather than to bidding company shareholders. Similarly, using a sample of 275 intraEuropean acquisitions, we find target firms to earn higher announcement abnormal returns
than do bidding firms in both domestic and cross-border acquisitions. In a study of 2,419
European M&As over the period of 1993-2001, Martynova and Renneboog (2006) find that
domestic mergers and acquisitions trigger higher wealth effects to the target firm shareholders
than cross-border transactions. However, the premiums paid depend on the location of the
target; when a UK target is involved the abnormal returns are higher than those of bids
involving a Continental European target. In a more recent study of 342 intra-European
transactions, Craninckx and Huyghebaert (2013) also find substantial differences between
Continental Europe (CE) and the UK or Ireland. In line with their results, we find that
shareholders of CE acquirers enjoy an abnormal value effect of about 0.61%, whereas
shareholders of UK or Irish acquirers suffer significant wealth losses of -1.43%, on a 3-day
event window. However, target abnormal returns are, on average, significantly larger for
firms located in the UK or Ireland than for targets from CE countries.
Secondly, our study brings new evidences on the main determinants of bid premiums paid
in European M&As. Previous studies have found that US targets of foreign (i.e., cross-border)
bidders tend to receive greater premiums than do targets of domestic bidders (Harris and
Ravenscraft 1991; Swenson 1993), and provide solid evidence regarding the source of the
difference - the required compensation to the target firm shareholders for incurring inferior
corporate governance after the merger (Rossi and Volpin, 2004; Starks and Wei, 2013). There
are limited evidences on this issue in European context. Using a sample of 275 public
acquisitions initiated by European bidders, we find that bid premiums are larger in crossborder than in domestic acquisitions where the method of payment is stock but the size of the
premium doesn’t depend on the differences in the quality of corporate governance systems
between the bidder and the target’s home countries. This effect is weak even when controlling
for target firm or industry characteristics that bidders from different countries might be
specifically attracted to.
Finally, we bring new evidence on managerial entrenchment hypothesis and its implications
for M&As value creation. Using a sample of 181 tender offers during the period of 1982–
1991, Kuipers et al. (2009) find that corporate governance proxies help to explain variation in
bidder’s abnormal returns. According to their interpretation, the results suggest that
governance structure affects managerial incentives when making takeover decisions.
Moreover, their theoretical development yields the implication that the corporate governance
impact on merger value should not be related to the method of payment. Thus, their
hypothesis does not have different implications for the proportion of mergers conducted with
cash or stock. Our results confirm this hypothesis. When we examine the combined abnormal
returns of targets and bidders, we find that the overall value creation is decreasing with the
difference in the bidder and the target’s corporate governance systems whether the means of
payment is cash or equity, consistent with the managerial entrenchment hypothesis.
The rest of the paper is organized as follows: section 2 provides the theoretical background
behind firms’ internationalization strategies and their impact on stock prices and shareholder
wealth. In this section we present the empirical hypotheses extracted from the theoretical and
empirical literature that will be tested using a sample of cross-border and domestic
acquisitions initiated by European firms. Section 3 describes the data and sample
characteristics. Section 4 presents the results of the cross-sectional analysis of target bid
4
premiums. In section 5 we discuss the empirical tests and the results for target and bidding
firm abnormal returns. Section 6 draws some conclusions, policy implications and underlines
the main limitations of the study.
2 Literature review and empirical hypotheses
With the advent of globalization there has been exponential growth of cross-border M&A
activity as barriers to entry into international markets are reduced. The targets of cross-border
acquisitions generate large abnormal returns similar to the domestic acquisitions according to
Harris and Ravenscraft (1991), Cheng and Chan (1995), and Danbolt (2004), but the wealth
effects of cross-border bidders are ambiguous. Harris and Ravenscraft (1991) argue that there
is no expected difference between abnormal returns of target firms in domestic acquisitions
and those of target firms in cross-border acquisitions provided that capital and factor markets
are not segmented internationally. Still, foreign direct investment theory posits that
multinational firms have a competitive advantage over local firms if market imperfections
exist. Hence, cross-border acquisitions are expected to generate more wealth than domestic
acquisitions.3 While some studies attribute the cross-border effects to differences in bid and
company characteristics between cross-border and domestic acquisitions, others find
significant cross-border effects even when controlling for bid characteristics. For example,
Campa and Hernando (2004) and Danbolt (2004) find no significant target cross-border
effects once differences in bid and company characteristics are controlled for, while Bris and
Cabolis (2008) surprisingly find the mean premium to be significantly lower for cross-border
than for comparable domestic targets.
The evidence of cross-border acquisitions effect on bidder returns is even more mixed.
While Doukas and Travlos (1988) and Francis et al. (2008) find US bidders to gain in crossborder acquisitions, other studies such as Moeller and Schlingemann (2005a) find US bidders
to lose from cross-border acquisitions. Kuipers et al. (2009) report significant losses to
bidders from cross-border acquisitions into the US, while Kang (1993) finds foreign bidders
to gain significantly from acquisitions of US targets. In a study of European acquisitions,
Campa and Hernando (2004) find bidders to perform better in domestic than in cross-border
acquisitions, although the difference is only significant for a long pre-announcement
window.4 In a more recent study, Danbolt and Maciver (2012) find both UK target and
bidding company shareholders to earn significantly higher abnormal returns in cross-border
than in domestic acquisitions. The additional gain to targets in cross-border as compared to
targets in similar domestic acquisitions amounts to a highly significant 10.1 percentage points
over a 3-day period around the day of the bid announcement. They also find that while target
shareholders gain significantly more from cross-border than from domestic acquisitions,
bidders on average are also found to perform significantly better – or maybe more accurately,
3
Analyzing data for the period of 1993 to 2000, Goergen and Renneboog (2004) find no significant
difference between announcement of abnormal returns for Europe-wide targets of mergers and acquisitions and
those of cross-border takeovers, whereas a higher announcement return for cross-border bidders in the European
region is observed. In contrast, using data for the period of 1985 to 1995, Moeller and Schlingemann (2005)
show that US firms which acquire cross-border targets relative to those that acquire domestic targets experience
significantly lower announcement returns of approximately 1%.
4
Campa and Hernando (2004) argue that lower returns to the bidders involved in cross-border acquisitions
in Europe can be explained by the existence of cultural, legal or other barriers to cross-border M&A activity.
Especially differences in takeover regulation seem to be the most important hurdle.
5
significantly less badly – in cross-border than in similar domestic acquisitions. Thus, while
targets gain substantially more in cross-border than in domestic acquisitions, the target
company cross-border effect does not in general appear to be the result of bidder overpayment, but rather reflect the substantially higher overall wealth creation in cross-border
than in domestic acquisitions. Cross-border acquisitions are thus preferable to domestic
acquisitions, suggesting there are real benefits from international investment.5
As a bidding firm is expected to create significant additional corporate value when it
acquires a target firm, the target shareholders will only be enticed to sell their share stakes if
they are offered a substantial premium. This premium (the future synergetic value) should be
immediately reflected in the target firms’ share prices. In a study of 2,419 European mergers
and acquisitions, Martynova and Renneboog (2006) find announcement effects of 9% for
target firms compared to a statistically significant announcement effect of only 0.5% for the
bidders. Including the price run-up the share price reaction amounts to 21% for the targets and
0.9% for the bidders. In a more recent study of 342 European takeovers, Craninckx and
Huyghebaert (2013) also find that M&A gains are not split equally between bidder and target
firm shareholders, with the market value of M&A gains to shareholders in the acquiring firm
being on average 3.71% lower than the market value of M&A gains to target shareholders. In
line with previous empirical studies on European M&As. we argue (H1) that target firm
shareholders are able to earn higher abnormal returns than bidding firm shareholders around
the announcement date. We expect this effect to be more pronounced in cross-border than in
domestic acquisitions.
While international acquisitions may be motivated by the aim of extracting synergies, the
acquisition decision may possibly be influenced by managerial considerations (Jensen and
Mekling, 1976). With the separation of ownership and control, and the significant scope for
agency conflict between shareholders and managers in acquisitions (Jensen, 1986), the
corporate governance practices in both the bidding and the target countries may also be
expected to have a significant impact on cross-border acquisitions (La Porta et al., 1998;
Rossi and Volpin, 2004). Strong corporate governance in the bidder country may restrict the
ability of managers to undertake value destroying acquisitions, and firms with better
shareholder protection can be expected to make better acquisitions by more carefully
identifying profitable investments and possibly pay lower premium for their targets (Kuipers
et al., 2009). In a country with weak governance systems, the number of poorly managed and
thus potentially undervalued targets may be larger. In that case, targets may benefit from a
transfer of good governance practices from the bidder to the target. Black et al. (2007) and
Francis et al. (2008) studying US bidders, Starks and Wei (2004) and Kuipers et al. (2009)
studying foreign bidders acquiring into the US, and Martynova and Renneboog (2008)
studying European bidders, all find higher bidder abnormal returns where the bidder comes
from a country with better corporate governance standards than those of the target country.
While their focus is mainly on the impact of international variations of laws and regulations
on the volume of mergers and acquisitions activity, other studies investigate their impact on
takeover premium.
5
Martynova and Renneboog (2006) shows that the most active participants in the intra-European crossborder market as acquirers were British, German, and French firms, which paid together more than US$ 1 trillion
to take over foreign firms. These deals represented 70% of the total amount spent on intra-European crossborder M&As over the period 1993-2001. Firms from the UK, Germany and France were also most frequently
the targets of cross-border acquisitions; they were sold for a total of US$ 0.9 trillion during the 5th takeover
wave, amounting to about 60% of the overall value of cross-border M&As.
6
For example, Rossi and Volpin (2004) find the level of the bid premium to be higher in
target countries with strong shareholder protection, although their results seem to be driven by
returns for US and UK targets. Bris and Cabolis (2008) similarly argue that differences
between bidder and target countries in terms of investor protection may have a significant
impact on the bid premium. Studying cross-border acquisitions in 39 countries, they find the
cross-border effect in the target bid premium to increase where the cross-border bidders come
from countries with better shareholder protection than those in the target country. Studying
European acquisitions, Martynova and Renneboog (2008) similarly find higher target returns
where their country’s corporate governance standards are lower than those of the bidder.
However, studying cross-border acquisitions by US firms, Black et al. (2007) find the foreign
targets to gain less when they are based in countries with low accounting quality, and Starks
and Wei (2004) find US targets to gain less when the foreign acquirer comes from countries
with strong corporate governance. In a more recent study, Starks and Wei (2013) report that
the target shareholders of both domestic and cross-border mergers earn significantly positive
takeover premiums, but the targets of the foreign bidders earn substantially greater premiums,
approximately 6% greater, on average. Using a sample of 275 intra-European acquisitions, we
investigate the issue whether European targets are able to earn higher bid premiums in crossborder than in domestic acquisitions. If this is the case what cause the European bidders to
pay more to acquire a foreign target?
To shed some light on this puzzle we test several hypotheses regarding the arguments that
the differences in corporate governance practices across countries rather than specific bid
characteristics may explain the larger cross-border bid premiums. Our main hypothesis
focuses on the share of the takeover gains that accrue to the target firm shareholders. The
share (i.e., the takeover premium) would result from either negotiations between the merging
firms or an expectation of the target firm value by the bidder as reflected in a tender offer.
The larger premiums can be explained by two competing hypotheses. On the one hand, if
target firms are acquired by firms with lower corporate governance quality and these
acquisitions are made through payments with bidders’ stock, we would expect the target firm
shareholders to demand larger premiums as compensation for their increased risk exposure to
inferior corporate governance. Correspondingly, these stockholders should be willing to
relinquish compensation if their level of protection is increased as a result of the merger. On
the other hand, prior literature reports higher bidder abnormal returns where the bidder comes
from a country with better corporate governance standards than those of the target country.
Thus, we may expect bidding firms that acquire targets in countries with lower corporate
governance standards to earn higher abnormal returns than those in countries with better
investor protections. As a result, the takeover premium should be decreasing with the quality
of the corporate governance of the bidding firm, which in our context should be closely
related to the corporate governance system of the bidder firm’s home country. This hypothesis
should hold primarily for deal offers in which the method of payment is stock of bidding firm
as the target firm shareholders in cash offers do not face the effects from changes in
governance quality. Based on these arguments we hypothesize (H2) that bid premiums paid in
European cross-border acquisitions will be decreasing with the quality of legal environment
and takeover regulation of the bidder’s home country. Therefore, we expect target firm
shareholders to be able to earn higher premiums if acquired by firms from countries with
lower corporate governance standards than those of the target country.
Prior research also investigates whether the differences in wealth effects between domestic
and cross-border mergers or the differences between cash and stock offers used in the
transaction are due to differences in target characteristics rather than differences in corporate
governance systems. That is, are the higher premiums paid by cross-border acquirers a result
7
of their preferences for certain types of firms that have greater value? For example, Starks and
Wei (2013) find that the effect of corporate governance differences between the US and the
foreign bidders’ home countries on bid premium cannot be attributed to target firm and
industry characteristics that bidders from different countries might be specifically attracted to.
There are limited evidences on this issue in the European context. We test this hypothesis for
a sample of 275 public acquisitions and argue (H3) that the larger bid premiums paid in
European cross-border acquisitions are due to corporate governance differences between the
bidder and the target’s home countries rather than differences in target or industry
characteristics.
A related hypothesis focuses on the merger announcement effects for the bidding firm’s
stock price. Because of different offsetting factors, the expected announcement effects on the
bidder’s stock price are not as straightforward as for the target firm’s stock price. If the bidder
is located in a country with a lower quality of corporate governance, then all else equal, it will
have to pay more to acquire the target, which would imply lower announcement abnormal
returns. However, three confounding factors could result in higher abnormal returns for the
bidder. Two of these factors arise due to the increased familiarity among investors that such a
merger announcement can create for the bidding firm, and the third arises from the influence
the target firm could have on the bidder’s corporate governance (Starks and Wei, 2013).
While these conclusions are driven by returns for US bidders, there are limited evidences
from the European market on whether differences in the level of shareholder protection in the
bidder and the target’s home countries affect the level of bidder returns. Prior research finds
that for mergers conducted in stock, the bidder abnormal returns are significantly increasing
with the quality of the corporate governance system. These results are consistent with the
hypothesis that bidding firms must compensate target firm shareholders if the quality of the
corporate governance system is reduced. Thus, one may expect the differences in corporate
governance characteristics of the bidder and the target countries to significantly impact on the
level of abnormal returns. To address this issue we analyze the impact of differences in
accounting standards quality, legal origin, the levels of anti-director rights, the quality of the
rule of law, and the level of shareholder protection between the bidder and the target
countries on the level of target and bidder abnormal returns. We hypothesize (H4) that the
differences in wealth effects between the bidder and the target firm shareholders are due to
differences in corporate governance systems rather than differences in firm and bid
characteristics.
Previous empirical studies reveal that the level of the target company‘s cross-border effect
vary significantly with the nationality of the targets and bidders. For example, Danbolt and
Maciver (2012) find that the cross-border effect is particularly high for US targets, consistent
with prior evidence of Conn and Connell (1990). However, despite the large gains to their
overseas targets, UK bidders perform significantly better in cross-border than in similar
domestic acquisitions, with the cross-border effect for UK bidders averaging 1.9 percentage
points. Similarly, Craninckx and Huyghebaert (2013) find substantial differences between
Continental Europe (CE) and the UK or Ireland. Specifically, shareholders of CE acquirers
enjoy an abnormal value effect of about 0.65%, whereas shareholders of UK or Irish bidders
suffer insignificant wealth losses of -0.83%. However, target abnormal returns are, on
average, significantly larger for firms targeted by UK or Irish acquirers than for targets of CE
acquirers.
In their study of 2,419 European mergers and acquisitions, Martynova and Renneboog (2006)
find that when a UK target is involved, the abnormal returns are higher than those of bids
involving a Continental European target. This difference in premiums reflects a more strict
takeover legislation in the UK than in the CE countries, which protects the target shareholders
8
from expropriation by the bidder and gives the target shareholders more power to extract
higher premiums in takeover negotiations (Goergen et al., 2005). In live with this finding, we
test the hypothesis (H5) that the target abnormal returns should be larger for firms located in
the UK or Ireland than for targets from Continental Europe. An opposite wealth effect should
be observed for bidding firm shareholders.
Using a sample of 181 tender offers during the period of 1982–1991, Kuipers et al. (2009)
find that corporate governance proxies help to explain variation in bidder’s abnormal returns.
According to their interpretation, corporate governance structures and legal environments
create incentive mechanisms for managers to engage in value-increasing (or value-decreasing)
cross-border takeovers. In other words, bidders from countries with poor governance regimes
have a greater tendency to make value-reducing acquisitions. Consistent with this hypothesis,
they find that the combined returns of bidders and targets are strongly related to corporate
governance proxies. In contrast, Starks and Wei (2013) find that corporate governance
measures affect the sharing of gains between targets and bidders rather than affecting the
overall merger value. To test the agency problem hypothesis we examine the combined
abnormal returns of target and bidding firms. We hypothesize (H5) that the overall value
creation will be decreasing with the differences in corporate governance systems between the
bidder and the target’s home countries in stock offers only, inconsistent with the managerial
entrenchment hypothesis in Kuipers et al. (2009).
We have already argued that abnormal returns can be expected to vary with the nationality
of targets or bidders. For example, Danbolt and Maciver (2012) find that while the crossborder effect for overseas targets acquired by UK firms averages 22.5 percentage points, the
cross-border effect for UK targets is more modest, at 4.6 percentage points, though still
highly statistically significant. The cross-border effect is particularly high for US targets,
consistent with prior evidence of Conn and Connell (1990). If countries within the European
Free-Trade Area (namely, France, Germany, Ireland, Netherlands, Sweden, Switzerland, and
other EFTA countries) are well integrated, acquisitions within the free trade area may be
perceived as having lower risk, but also potentially lower diversification benefits, than other
cross-border acquisitions. Intra-ETTA acquisitions may therefore be associated with lower
target, and possibly also lower bidder, announcement effects. To account for these effects, we
use a dummy variable that takes value 1 if the target (bidder) company is located in
Continental Europe or UK/Ireland, and whether it belongs to the European Free-Trade Area
(EFTA), respectively.
3 Data sources and sample
Data on European M&A deals are extracted from ZEPHYR – Worldwide Database on
Mergers and Acquisitions. The data meet the following criteria:
1. The announcements include transactions made by European firms only;
2. Both target and acquiring firms are public (non-financial) companies traded on
European stock exchanges;
3. The deal is announced during the period 2003-2010 inclusively;
4. Deals must be announced and completed;
5. Companies with multiple M&A deals during the observation period are included;
6. The percentage of acquired stake should be between 50% and 100%, with the
percentage of final stake minimum 100%;
7. Only transactions greater than €100,000 are included;
9
8. Market capitalization, financial and accounting data for the sample companies must be
available in Thomson DataStream International.
Additionally, only transactions classified as mergers or acquisitions of majority interest are
included. That is, we exclude all the cases defined as an acquisition of assets, an acquisition
of certain assets, a buyback, or a recapitalization. Thus, our original sample consists of 449
M&A transactions. Information concerning merger and acquisition announcements and deal
prices has been collected from Bureau Van Dijk’ Zephyr database. Data related to daily stock
returns and market indexes are extracted from DataStream Thomson Reuters Financial. Both
target and acquiring firms must have stock price and shares outstanding data available from
DataStream Thomson Reuters in the year before announcement. This reduces our sample to
275 observations. We consider both domestic and cross-border transactions. The final sample
involves 275 transactions, including 215 domestic and 60 cross-border acquisitions.
Table 1 presents sample description of cross-border and domestic acquisitions. Panel A
reports the annual number of acquisitions completed during the 2003 - 2010 period. We
observe a very interesting tendency – there is a steady increase in domestic acquisitions
during the sample period up to the year of 2007, with the largest amount of deals concentrated
in the years of 2005-2006 (26.9% of all domestic deals are announced during that period) as a
result of the wealthy economic conditions. After a year of decline, domestic deals resumed
growth in the following year, while cross-border deals continue to follow a decreasing pattern
until 2010. Panel B shows the distribution of targets and bidders by country of origin. While
the UK dominates both as target of cross-border and domestic acquisitions and the most
frequent acquirer of UK (and other European) companies, our sample also includes
transactions from a number of other countries (27 in total). The data show that the largest
number of transactions occurs in the UK (31.3% of total acquisitions) followed by France
(11.3%) and Germany (7.6%). Panel C presents acquisitions by primary SIC code. In our
sample, around 27.4% of all domestic acquisitions are made by firms in finance, insurance
and real estate industry, followed by services (21.4%), transportation and communications
(17.7%), and manufacturing (16.7%). Similar distribution among industries is observed also
for cross-border transactions (70% of all deals are in services and manufacturing). The rest of
the transactions are distributed across several other industries. In Panel D, we classify the
relatedness of bidder and target activities by their SIC codes. Data show that 38.3% of all
cross-border transactions are conducted between related businesses (i.e. between firms having
the same primary 3-digit or 4-digit SIC codes), compared to 29.8% for domestic transactions.
Over 50% of all cross-border and domestic transactions are conducted in unrelated industries.
Panel A of Table 2 compares the deal characteristics of domestic versus cross-border
acquisitions. Most of the cross-border acquisitions are cash deals: 70% of the cross-border
transactions are completed with cash compared with 34.4% for the domestic acquisitions. The
difference, which is significant at the 1% level, is consistent with the hypothesis that bidding
firms from countries with inferior corporate governance system would have to compensate
target firm shareholders more (that is, pay higher premium) for stock offers than cash offers.
If this hypothesis is correct and assuming that European bidders in the majority of cases
acquire firms with similar or better corporate governance practices (e.g., UK targets), then we
should observe a higher proportion of cash deals in cross-border acquisitions than in domestic
acquisitions. We test this hypothesis more formally in a later section. The data in Panel A
show that acquisition is the dominant method of transaction both in European cross-border
and domestic deals, with the difference being statistically significant at the 5% level. There is
very limited number of mergers and IBOs only used in domestic transactions. Using the SIC
industry classification we find that cross-border deals have a greater tendency to be crossindustry than domestic acquision, and to involve larger firms.
10
For the subsample of cross-border acquisitions, Panel B of Table 2 compares the differences
between bids that involve cash and bids using bidders’ equity. In this case, there is no
significant difference in the percentage of cash and stock offers that are cross-industry, but
there is significantly higher tendency for the cash bids to involve cross-border deals with
larger firms (the mean difference is significant at the 10% level). Previous research reports
that if a foreign bidder is cross-listed in a second market (e.g., the US) before or within the
year after the acquisition announcement, that bidder is significantly more likely to use stock
rather than cash to complete the acquisition (Starks and Wei, 2013). We are unable to test this
hypothesis because of the lack of sufficient data for such firms in our sample.
[Insert Table 1 Here]
[Insert Table 2 Here]
4 Target firm bid premiums
4.1 Univariate analysis
Previous studies have primarily used the announcement period abnormal return to proxy for
the takeover premium. One reason for this approach is the difficulty in directly calculating the
premium. That is, although the definition of a premium is straightforward for cash offers (the
difference between the offered cash price and the contemporaneous stock price), the
definition of takeover premium for a stock offer is more ambiguous. In the latter case, the
computation of premium depends on how much of the announcement effect is factored into
the acquirer’s stock price already. Following Starks and Wei (2013) the bid premium is
calculated as the percentage premium of the offer price to the target firm’s market price one
week prior to the original announcement date.
Panel C of Table 2 reports the takeover premiums for the target firms, divided into whether
they are being acquired by companies from the same country (domestic acquisition) or by
foreign companies (cross-border acquisition). It also shows summary statistics for the
subsamples of cash and stock offers, along with t-statistics for the differences between the
two types of deals (cash and stock) and between domestic and cross-border acquisitions. The
table illustrates that the target firm shareholders of both domestic and cross-border
acquisitions earn significantly positive bid premiums, but the targets of cross-border deals
earn substantially greater premiums, approximately 5% greater, on average. Our results are in
line with Starks and Wei (2013) for the US market. A decomposition of the deals into cash
and stock offers in Panel C indicates that cash offers are generally associated with smaller bid
premiums in both domestic and cross-border deals, but the difference is significant only for
the stock offers. In fact, the difference in the target bid premiums between cross-border and
domestic acquisitions lies primarily in stock offers, consistent with our hypothesis. The
difference between bid premiums across cash and stock offers is statistically significant at the
5% level. In the next section we further test our hypothesis that differences in bid premiums
can be explained by variations in corporate governance structures.
4.2 Takeover premium and corporate governance differences
In the previous section we asked the question if the higher premiums in cross-border
acquisitions paid by European acquirers are a result of their preferences for certain types of
firms or due to variations in corporate governance practices. In order to empirically test
whether the corporate governance differences between the bidder and the target’s home
11
countries affect target premiums, we regress the estimated bid premium on proxies for
corporate governance and investor protection, controlling for different bid and target firm
characteristics. If our hypothesis is valid, we should find that the corporate governance
proxies are associated primarily with a significant effect in the stock offers.
We use four different proxies to control for the quality of corporate governance, based on
the investor protection measures of Djankov et al. (2008) and La Porta et al. (1998).
To
proxy for the governance quality of the host country we use the index proposed by Djankov et
al. (2008) - the so called anti-self-dealing index (GOV) - that measures the protection of
minority shareholders against expropriation by insiders. The index ranges from 0 (the lowest
protection) to 1 (the highest protection). In countries with poor governance quality,
international expansion through M&As may be influenced by some unknown factors that
could deteriorate performance and the value of transaction. Therefore, we need to control for
these effects in our regression analysis. Our second proxy is the legal origin of the bidding
firm’s home country (LEG_ORIG). La Porta et al. (1998) argue that countries with English
common law legal origins provide greater investor protection than do other countries.
Similarly, Demirguc-Kunt and Maksimovic (1998) show that legal systems can affect a firm’s
financing decisions and growth. Accordingly, we employ an indicator (dummy variable) for
whether the company is originating from a country with English common law legal system. If
so, the corporate governance practices should be more similar to those in the UK and the US.
Our third proxy is a combined measure of shareholder protection (SP). This proxy is
computed as the product between the anti-director rights and the rule of law. A strong rule of
law coupled with shareholders rights should result in a strengthened relation than the
shareholders rights viewed in isolation. This variable measures the effective rights that
minority shareholders hold against managers and directors. With lower shareholder protection,
the private benefits of control are high and the market for corporate control is relatively less
effective. At the same time, minority shareholders have fewer rights and are more likely to be
expropriated. An important aspect of investor confidence in a financial market is the quality of
disclosure to the investors. To measure investor confidence, we use an accounting standards
measure (ACC_STAND) obtained from La Porta et al. (1998). This index is constructed
based on the examination of company reports from different countries. The higher the index,
the better are the accounting standards in that country.
To examine the effect of corporate governance on target bid premium we take a different
approach - we regress the estimated bid premium on the differences in country governance
characteristics of the bidder and the target firm. As pointed out previously, we do not expect
that the differences in corporate governance systems between countries are the only factors
affecting the bid premiums. A number of other hypotheses have been presented in research
literature to explain differences in takeover premiums paid in cross-border versus domestic
transactions. Huang and Walking (1987), Travlos (1987), Servaes (1991) and Andrade et al.
(2001) suggest that the method of payment influences the takeover premium that must be
paid. Specifically, they find that cash offers generally bring higher abnormal returns than do
stock offers to both target and bidding firm shareholders. Since Table 2 shows that a
significantly larger proportion of cross-border deals than domestic deals are cash offers, we
need to control for the possibility that higher bid premiums are driven by the fact that more of
these acquisitions use cash than stock as the means of payment. We introduce an indicator
(dummy variable) for cash-only (CASH) and stock-only (STOCK) payment, with mixed
payment offers as the residual category. In line with the previous research (see Faccio et al.,
2006) we assume target firm gains to be less when paid in equity than in cash.
According to the prior research, the size of the target firm as compared to the bidding firm
is important in determining the extent to which corporate governance differences matter. That
12
is, the larger the size of the target relative to the bidder, the more important the bidder’s
corporate governance is in the acquisition process and presumably, the greater the negotiating
power of the target management. Therefore, the relative size of the target (REL_SIZE) should
strengthen the effect of corporate governance differences. We next control for the size of
bidding firm (A_SIZE) measured by the market value of the company prior to the date of the
bid announcement. Due to the non-normality of company size, we use a log transformation of
market values in the cross-sectional analysis. We also control for the type of transaction
(TYPE), a dummy variable taking the value 1 if the transaction is defined as an acquisition,
and the size of any stake held by the bidder in the target firm prior to the acquisition
(STAKE). While the former may not have a significant impact on the announcement
abnormal returns, we do expect the latter to account for the observed target wealth effects.
Finally, we control for industry diversification with a dummy taking the value 1 if the
acquirer and target are operating in a different 4-digit SIC industry (DIVERSIFY), and a
cross-border dummy (CB) taking the value 1 if the transaction is cross-border acquisition.
Researchers argue that exchange rates and tax systems should also have an impact on
cross-border wealth effects (Harris and Ravenscraft, 1991; Swenson, 1993; Dewenter, 1995).
Prior research provides mixed evidence regarding the impact of exchange rates on the
abnormal returns in cross-border acquisitions. While Harris and Ravencraft (1991) and Kang
(1993) find target abnormal returns in cross-border acquisitions to be higher when the bidding
country’s currency is strong relative to the currency of the target country, Danbolt (2004) and
Starks and Wei (2004) find no support for the exchange rate hypothesis on target returns.
According to Kiymaz (2004) this variable is expected to be inversely linked to wealth gains to
both acquiring and target firms. Theory of imperfect capital markets argues that differential
tax systems between nations can have an impact on the marginal productivity of foreign direct
investment through acquisitions (Scholes and Wolfson, 1990). The existing evidence on this
variable is also mixed. Whereas Servaes and Zenner (1994) provide strong evidence that
taxes affect the abnormal returns earned by US targets of foreign acquisitions, Kang (1993)
and Kuipers et al. (2004) find that this variable is not informative. Following previous
studies, we expect a negative effect of both exchange rate changes and tax differences on bid
premium.6 A short description of all the variables used in the regression analysis is presented
in Appendix A. The correlation matrix of dependent and explanatory variables is presented in
Appendix B, while the sample statistics of the main variables used in the analysis is reported
in Appendix C.
[Insert Table 3 Here]
Each of the regression equations includes all of the control variables, but only one of the
corporate governance proxies since the corporate governance measures are highly correlated
with each other. Our main hypothesis is that bid premiums paid in European cross-border
acquisitions should be decreasing with the differences in bidder and target’s corporate
governance systems. If our hypothesis is correct, then we should see significantly larger bid
premiums for stock offers in firms with greater levels of governance/investor protection. The
results, provided in Table 3, do not support this hypothesis. Although we find the bid
premiums to be larger in cross-border than in domestic acquisitions, no evidence of a
6
Contrary to the predictions of Froot and Stein (1991) of companies acquiring abroad when their home
currency is strong, for our sample of European bidders we find that the currency of the bidder on average fell by
an insignificant 0.14% relative to the currency of the target during the year prior to the acquisition (see Appendix
B).
13
significant effect of corporate governance measures on bid premium exists. The impact of
corporate governance differences between the bidder and the target’s home countries is not
robust to controlling for bid characteristics, with coefficient estimates positive but
insignificant. This effect can be explained with the fact that European bidders acquire their
targets in countries with similar or better corporate governance standards (around 54% of all
transactions include targets from well-developed Western European countries and 32% from
UK/Ireland). Our results support Martynova and Renneboog (2008) findings for European
market but contradict Starks and Wei (2013) who find that foreign bidders from countries
with inferior corporate governance and investor protection must pay more to acquire the US
target firm. As the marginal effect of corporate governance measures on the bid premiums is
weak, we expect that larger premiums paid in European acquisitions are due to differences in
bid and target firm characteristics rather than differences in corporate governance systems.
We do find bid characteristics to have a significant impact on target bid premium, with
targets gaining more when paid in stock, if the bidding company is relatively small in size, or
where the acquiring company has limited stake in the target company prior to the bid
announcement. We do not find significant correlation between the size of the bid premium
and the relative size of the target to the bidder, whether the transaction is diversifying or the
prevailing type of transaction is acquisition (see model specifications 1 through 4). There is
weak evidence that if a transaction is conducted during a period in which the bidder currency
is depreciating against the target currency, the bidder is able to pay a higher amount relative
to other periods when the currency effect is opposite. Consistent with prior research we find
that the takeover premium is higher when the tax differential between the target and the
bidder home countries is negative (thought the marginal effect is insignificant on average).7
4.3 Bid premiums and target firm characteristics
We next investigate whether the observed differences in wealth effects between domestic and
cross-border acquisitions (see Table 2, Panel A), or the differences between cash and stock
bid premiums (see Table 2, Panel C) are due to differences in target characteristics rather than
differences in corporate governance systems. That is, are the higher premiums in cross-border
acquisitions paid by European acquirers a result of their preferences for certain types of firms
that have greater value? In Table 4 we test this hypothesis by comparing characteristics of the
target firms in the year prior to the deal announcement year. The characteristics we employ
are return on assets (ROA), return on equity (ROE), sales, assets, size (market capitalization),
market-to-book value, book leverage and market leverage. We compare these characteristics
across three different sets: domestic versus cross-border targets in which the means of
payment is cash (Panel A), domestic versus cross-border targets in which the means of
payment is stock (Panel B), and cash versus non-cash bids for cross-border acquisitions
(Panel C).
The results in Panel A of Table 4 show that no differences exist, on average, between the
target characteristics for domestic and cross-border acquisitions in which the means of
payment is cash. For the stock bids (see Panel B), targets of cross-border bidders tend to have
lower market-to-book ratios than do targets of domestic bidders. There is no statistically
significant difference between other firm characteristics of domestic and cross-border targets.
7
We also introduce a dummy variable to control for the location of target firm, taking value 1 if the target
firm is located in Continental Europe, and zero otherwise. The estimated coefficient of CE dummy variable is
insignificant in all model specifications. The results (not presented here) do not change when a dummy variable
for Western or Eastern European target is used in the regression analysis.
14
Finally, in Panel C we find that the differences in target characteristics between cash and
stock deals that are statistically significant are in ROA, ROE, market-to-book ratio and
market leverage. The cross-border targets in which cash is employed tend to be larger in
terms of assets and market capitalization, and have much greater ROA and ROE than do
cross-border targets in which stock payment is used.
To further isolate the pure effects of changes in corporate governance for the target firm, we
estimate the bid premium controlling for several target firm characteristics that could affect
the premium (see Table 4). First, we control for possible target firm misevaluation using the
market-to-book ratio. Target firms that are undervalued may attract more bidders and thus
receive higher bid premiums. Second, we account for the potential effects of target firm’s size
and its profitability on bid premiums by controlling the logarithm of total assets and ROA of
the target firm. In Table 3 (model specifications 5 through 8), we re-examine the relation
between bid premium and the corporate governance differences controlling for these
additional target firm characteristics. The results in the table indicate that regardless of the
proxies we use for corporate governance or investor protection, bid premiums are
significantly higher in stock offers than in cash payment but this effect is not due to the
differences in target firm characteristics.8 This finding confirms our hypothesis that the larger
bid premiums paid in cross-border acquisitions can be attributed to specific target or industry
characteristics that bidders from different countries might be specifically attracted to. The rest
of the control variables used in models 5 though 8 keep their signs and magnitude.
[Insert Table 4 Here]
4.4 Robustness check
Previous research finds differences in corporate governance systems to be important
determinants of the bidders’ method of payment. Bidders from countries with better corporate
governance/investor protection are more likely to pay with equity not cash. Since previous
studies (Huang and Walking 1987; Travlos 1987; Servaes 1991) have shown that the target
abnormal returns are lower when the acquisition is completed with stock, it is unclear
whether it is the difference in corporate governance between the bidder and the target’s home
countries or the method of payment that explains the higher bid premiums paid by acquirers
from countries with inferior corporate governance system. Therefore, we try to account for
this selection bias through the Heckman (1979) two-stage estimation process using the
inverse Mills ratio. In the first step, a regression for observing a positive outcome of the
dependent variable is modeled using a probit model. The inverse Mills ratio is generated from
the estimation of the probit model (a logit cannot be used). The probit model assumes that the
error term follows a standard normal distribution. The estimated parameters are used to
calculate the inverse Mills ratio, which is then included as an additional explanatory variable
in the OLS estimation.
Essentially, we include inverse Mills ratio in the ordinary least square (OLS) regression of
bid premium on differences in corporate governance and other control variables to account
for the self-selection problem. The results of the estimation are reported in Appendix D. After
correcting for this self-selection bias, the effects of corporate governance proxies on bid
8
We also control for the impact of industry competition on the takeover premium. Mitchell and Mulherin
(1996) argue that deregulations and industry shocks have significant impacts on merger activities. We therefore
control for industry competition using the Herfindahl index, defined as the sum of squared market share in terms
of firm sales across individual firms within an industry. We hypothesize takeover premiums to be higher for target
firms operating in less competitive industries. The results (not reported here) reject this hypothesis.
15
premium remain statistically insignificant and are similar to these reported in Table 3. Bid
characteristics are found to have a strong explanatory power as in the original model. The
estimated coefficient on the inverse Mills ratio, however, is insignificant in all model
specifications. We also re-estimate target and bidders’ abnormal returns using the Heckman
model and those results (not reported here) do not show any material change from the original
results presented in Table 7 below.
5 Target and bidder abnormal returns
5.1 Estimation of bidder and target abnormal returns
Event study methodology in the field of finance has gained great popularity and has become a
standard in evaluating the behavior of firms’ stock prices around corporate events (Kothari
and Warner, 2007). The researcher tests the hypothesis that an information release affects the
values of stocks, on average, across firms with similar information arrival. A rich
methodological literature analyzes the performance of event-study methods. Most of the
literature to date focuses on U.S. data, but the use of event study methods with multi-country
data is growing rapidly (Campbell et al., 2010).
The analysis of stock price reaction to the announcement of an event involving a firm’s
strategic expansion is carried out in two steps according to Fama et al. (1969): 1) Estimation
of abnormal returns in the period around the event announcement (hereafter, event period);
and 2) Analysis of the statistical significance of abnormal returns.
Step one is performed by employing the market model in order to estimate expected returns
as follows:
Ri,t  αi  βi Rm,t  εi,t with t = 1 ….T ,
(1)
where Ri,t is the return on security i in period t, Rm,t is the return on market index9 in period t,
αi is the intercept, i is the slope, i,t is the error term, and T is the number of periods in the
estimation period (the period used to estimate parameters αi and i). In our case Equation (1)
is estimated from a 252-day estimation period beginning 292 days through 41 days prior to
the announcement day.
After having estimated parameters in Equation (1) by OLS regression methodology for each
i-th security, we estimate abnormal returns by subtracting the expected return from the
observed (actual) return as follows:
^
^
ARi,t  Ri,t  (  i   i Rm,t ) ,
(2)
where ARi,t is the abnormal return for security i in period t, Ri,t is the observed return on
^
^
security i in period t,  i and  i are estimations of αi and i.
According to the literature on event studies, the length of both estimation period and event
period is left to the researcher, therefore great differences among empirical studies are found
(see Peterson, 1989). Following Brown and Warner (1985), we use daily returns and a 252trading day window for estimation period starting at day -292 and ending at day -41. For the
9
The market index used in the analysis is Datastream World Market Index.
16
event period, we focus on several windows: (-10, +5), (-5, +5), (-2, +2), (-1, +1), (-1, 0), (-2,
+1). We employ the market-adjusted model without any correction to take into account
concerns related to infrequent (non-synchronous) trading pointed out by Dimson (1979) and
Scholes and Williams (1977). However, these alternative techniques seem to convey no clearcut benefits in an event study (Bartholdy and Riding, 1994; Kim, 1999). We deal with this
problem by dropping stocks that face clear and evident illiquidity problems.
We introduce the cumulative abnormal return (CAR) to accommodate multiple sampling
intervals within the event period:
n
CARi,n   ARi ,t ,
(3)
t 1
where CARi,n is the cumulative abnormal return for security i over n periods.
Then, we obtain the cumulative average abnormal return for the portfolio of announcements
as follows:
1 N
(4)
CAAR N, n   CARi ,n ,
N t 1
where CAARN,n is the cumulative average abnormal return for a portfolio of N securities for a
period of length n.
The second step is performed by following Morresi and Pezzi (2012) based on the original
work of Mikkelson and Partch (1988). Instead of standardizing each individual abnormal
return (AR) and accumulating each individually standardized AR over the event period,
Mikkelson and Partch (1988) take into account the dependence created by accumulating
individual abnormal returns, calculated using a single set of estimates of αi and i. They
estimate the variance of the sum of individual abnormal returns (i.e. CARi,n) and use it to
standardize each CARi,n. Morresi and Pezzi (2012) call this test statistics MP(t). In order to
make the test robust in case of possible changes in volatility associated with the event, they
apply a second approach proposed by Boehmer et al. (1991). It uses the cross-sectional
variance of the standardized abnormal returns in order to make standardization. This test
statistics is known as BMP(t). According to Morresi and Pezzi (2012) MP(t) test can be
derived as follows:
SCARi, n 
CARi ,n
 i*,n
,
(5)
where SCARi,n is the standardized cumulative abnormal return for security i over n periods,
and  i*,n is computed as follows:
t2
 i*,n   i n 
2
 ( Rm,t  n( Rm )) 2
n
t t
 1T
T
 ( Rm,  Rm ) 2
,
(6)
 1
where  i*,n is the standard deviation of the cumulative abnormal return for security i over n
periods; δi is the standard error of the regression used to obtain market model parameters (αi
17
and i); T is the number of periods in the estimation period; n is the number of periods in the
event period; t1 and t2 are, respectively, the first and the last day of the event period; Rm,t is
the market return for period t in the event period; Rm is the mean market return in the
estimation period; Rm,τ is the market return for period τ in the estimation period.
The distribution of SCARi,n is Student’s t with T - 2 degrees of freedom. For a large
estimation window (T > 30), the distribution of SCARi,n is well approximated by the standard
normal distribution. For a sample of securities, the portfolio standardized abnormal return is
presented by the MP(t) statistics:
N
MP(t ) 
 SCARi ,n
i 1
,
N
(7)
where N is the number of securities. According to the Central Limit theorem, MP(t) is
assumed to be distributed unit normal for large N.
BMP(t) can be derived as follows (see Morresi and Pezzi, 2012):
BMP (t ) 
1 N
 SCARi ,n
N i 1
1 N
1 N
 ( SCARi ,n   SCARi ,n ) 2
N  1 t 1
N i 1
(8)
According to the Central Limit theorem BMP(t) is assumed to be distributed unit normal for
large N.
Table 5 provides the results of the event study analysis for the bidder and the target firms.
Target abnormal returns are reported in Panel A of Table 6. Target company shareholders on
average earn significant positive abnormal returns around the time of the bid announcement,
with mean cumulative abnormal returns (CAARs) to targets in cross-border acquisitions
amounting to a highly significant 7.34% over the 3-day (t-1; t+1) event window. More than
58% of sample firms earn positive cumulative abnormal returns. Target companies in
domestic acquisitions on average also earn positive abnormal returns, but the gains are
significantly smaller, averaging 4.5%. The difference in target returns between cross-border
and domestic acquisitions – the target company cross-border effect – amounts to a marginally
significant and positive 2.84%, with more than fifty percent of the cross-border targets
earning higher 3-day CAARs than shareholders in domestic acquisitions.
A 3-day event window may arguably be too short to capture the full impact of acquisitions,
and we also analyze abnormal returns over an 11-day event window, from five days prior to
five days after the day of the bid announcement. Over this extended event window, target
abnormal returns in cross-border acquisitions are even higher, at 7.97%, and the difference in
target returns between cross-border and domestic acquisitions (so called cross-border effect)
amounts to almost 1%. Indeed, as can be seen from Figure 1 (Panel A), target company share
prices on average start rising long before the bid announcement, with cumulative abnormal
returns over the time period from t-20 to t-2 days averaging 2.0% for cross-border and 2.3%
for domestic targets. Over an extended 41-day period around the bid announcement, targets
earn 9.2% cumulative abnormal returns (on average) in cross-border acquisitions, compared
to almost 8.0% in domestic acquisitions, leading to a positive cross-border effect of 1.2% similar to that captured by the 11-day event window.
18
As reported in Panel B of Table 5, bidders in cross-border acquisitions on average earn
small and positive abnormal returns of 0.13% over the 3-day event window. However,
bidders in domestic acquisitions, on average, earn abnormal returns close to, and
insignificantly different from zero, amounting to -0.08%, over the same period. Over the
extended event window of 11 days, bidder abnormal returns in both cross-border and
domestic acquisitions are negative and statistically insignificant. Thus, while target
shareholders gain significantly more in cross-border than in domestic acquisitions, bidders on
average also perform significantly better in cross-border than in domestic acquisitions. These
results are in line with Danbolt and Maciver (2012) finding of UK firms. The bidding firm
cross-border effect amounts to a positive 0.21% over the 3-day event window but shows
insignificant and negative of -0.17% over the longer event window. The movements in
bidders abnormal returns over the period from t-20 to t+20 days is depicted in Figure 1, Panel
B. While the abnormal returns to bidders in domestic acquisitions fall marginally over the
post-acquisition period, the bidding company abnormal returns and cross-border effect remain
strongly negative.
In panel C of Table 5 we present the results for the announcement abnormal returns for
shareholders of the target, the bidder, and the combined firms in (-1, +1) and (-5, +5) event
windows, respectively. On average, target shareholders realize large positive abnormal returns
of 5.12% in the 3-day window and 7.20% in the 11-day window, respectively, both
significant at the 1% level. In line with our hypothesis we find that when a UK or Irish target
is involved in the transaction, target abnormal returns are, on average, significantly higher
than those of bids involving a Continental European target; the difference equals -2.66% in
the (-1, +1) window, significant at the 10% level (see Panel D). We also find that
shareholders of acquiring firms in Europe on average achieve abnormal returns close to, and
insignificantly different from zero, amounting to -0.04% and -0.38% in the (-1, +1) and the (5, +5) window, respectively. Again, we note substantial differences between Continental
Europe (CE) and the UK or Ireland. Specifically, shareholders of CE acquirers enjoy a
positive value effect of about 0.61%, whereas shareholders of UK or Irish bidders suffer small
wealth losses of 1.43%, in the (-1, +1) window, with the mean difference statistically
significant at the 1% level.
The average combined abnormal returns, which we use as proxy for total M&A gains, are
positive and highly significant too, amounting to 2.94% in the 3-day window, and 2.87% in
the 11-day window, surrounding the deal announcement date (see Panel C). The combined
CAAR is not significantly different across Continental Europe and the UK or Ireland in both
event windows. Overall, combined M&A returns are positive for 52% of the sample deals,
while bidder shareholders realize a positive announcement effect in 46% of all transactions.
This result is in line with Martynova and Renneboog (2011) finding that in Europe a
considerable fraction of acquisitions fails to create shareholder value. It yet remains to be
established whether these value effects in European M&As are associated with the differences
in corporate governance practices or bid characteristics between target and bidding firms
studied in this article.
[Insert Table 5 Here]
The analysis above suggests that both targets and bidders on average perform better in
cross-border than in domestic acquisitions. While the target company abnormal return is
particularly high in cross-border acquisitions initiated by European companies, we do not find
evidence that European bidders perform differently in cross-border and domestic acquisitions.
In line with our main hypothesis, we find that in European acquisitions target firm
19
shareholders earn larger abnormal returns than do bidding firm shareholders; this effect is
more pronounced in cross-border than in domestic acquisitions. We also find that wealth
effect varies significantly with the location of the target and bidding companies in our sample.
Target abnormal returns are on average significantly larger for bids involving UK or Irish
target than those of bids involving a Continental European target. The opposite effect is
observed for bidders from Continental Europe and the UK, which is in line with Martynova
and Renneboog (2006).
Prior research suggests bid characteristics may have a significant impact on target and
bidder returns, and if there are systematic differences in the characteristics of targets and
bidders in cross-border and domestic acquisitions, the cross-border wealth effects may be
attributable to such differences rather than to the different nationalities of the targets and the
bidders. In the next section we therefore analyze the differences in the characteristics of
companies involved in cross-border and domestic acquisitions, and their impact on bidder and
target abnormal returns.
5.2 Bid characteristics and their impact on abnormal returns
In this section we investigate whether differences in firm and bid characteristics between
cross-border and domestic acquisitions can explain the observed target or bidder abnormal
returns. We first explore the sample characteristics and the correlations between the various
bid characteristics and 3-day abnormal returns, before presenting the multivariate regression
models and their results.
Sample characteristics for target and bidders are reported in Panel A of Table 6, while the
Pearson correlation coefficients between the 3-day cumulative abnormal returns and bid
characteristics are presented in Panel B. Prior research generally finds both target and bidding
firm shareholders to gain significantly more in cash than in equity offers.10 To test this
hypothesis we introduce dummy variable to control for cash-only and equity-only payment,
with mixed payment offers as the residual category. Data in Panel A show that significant
differences between domestic and cross-border acquisitions are observed in the method of
payment. While cash-only payment is offered in more than 70% of the cross-border
acquisitions, such payment is used approximately in 34% of all domestic acquisitions based
on the sample of targets and 36% based on the sample of bidders. The difference between
cross-border and domestic acquisitions in the prevalence of cash payment is substantial and
statistically significant for both targets and bidders. Bid offers with stock payment are
relatively rare in case of cross-border acquisitions (both for targets and bidders) but present in
more than 47% of domestic acquisitions.
In Panel B we explore the relationship between the means of payment and announcement
abnormal returns, and our results are generally consistent with the prior literature. We find
that target abnormal returns are negatively correlated with equity payment, although the
method of payment is not found to have a statistically significant impact on target returns in
both domestic and cross-border acquisitions. Domestic bidders perform significantly better in
cash-financed acquisitions than in transactions using other forms of payment. At the same
time the bidder abnormal return is significantly negatively correlated with the means of
payment used in cross-border acquisitions. We may expect that the higher proportion of
cross-border than domestic acquisitions with cash bids and the higher returns to targets in
10
See e.g., Franks et al. (1988), Danbolt (2004) and Bi and Gregory (2011) for evidence on the payment
effect in acquisitions. While most studies find higher abnormal returns in cash acquisitions, Georgen and
Renneboog (2004) find bidder abnormal returns to be significantly higher in equity than in all-cash bids.
20
cash than in equity offers will contribute to the target company wealth effect. We explore this
further in the cross-sectional regression analysis below.
We next control for the effects of company size and the relative size of the target to the
bidder. The former is measured by the market value of the company prior to the date of the
bid announcement and the latter is measured by the total assets of the target to the total assets
of the bidder.11 Data in Panel A show that the market values are on average higher for crossborder targets and bidders than their domestic counterparts, with the mean difference
statistically significant only for bidding firms. However, data in Panel B suggest that target
abnormal returns are negatively correlated with firm size, which would seem to work against
the observed target company cross-border effect (see Panel A in Table 5). We also find
marginally significant difference in the relative size of the target to the bidder between crossborder and domestic acquisitions (see Panel A), as well as evidence that the relative size is
strongly correlated with target and bidder abnormal returns in cross-border acquisitions (see
Panel B).
Prior research has suggested the method of acquisition does matter, and usually controls for
whether the transaction is undertaken through a tender offer or a merger.12 We use a dummy
variable taking the value 1 if the deal is an acquisition, and zero otherwise. As reported in
Panel B, the results suggest that domestic targets do perform better in other types of
transactions (joint ventures and institutional buy-outs) than acquisitions. As can be seen from
Panel A, there are statistically significant differences in the proportion of cross-border and
domestic transactions that are undertaken through acquisitions. We may conclude that this
variable is likely to account for the observed target or bidder wealth effects. We find target
abnormal returns to be negatively correlated with the size of the stake held by the bidder in
the target prior to the acquisition.13 Bidders on average hold slightly higher pre-bid stakes in
the target in domestic than in cross-border acquisitions and this may contribute to the
observed target company wealth effect. Therefore, we control for the size of any stake held by
the bidder in the target prior to the acquisition in the cross-sectional analysis.
Finally, we control for industrial diversification with a dummy variable taking the value 1 if
target and bidder companies have different 4-digit primary SIC codes, and zero otherwise. A
higher proportion of domestic than cross-border acquisitions involve industrial diversification
(see Panel A). However, the correlation coefficient in Panel B suggests that whether the
acquisition is focused or result in diversification it appears to have limited impact on the level
of either target or bidder abnormal returns. Based on this analysis we next explore the
relationship between bid characteristics and abnormal returns in a multivariate setting.
[Insert Table 6 Here]
5.3 Cross-sectional analysis of abnormal returns
11
Rossi and Volpin (2004) argue there are fewer potential bidders for large targets, leading to less
competition and lower target abnormal returns. Peterson and Peterson (1991) find smaller targets to receive
greater absolute returns, and Campa and Hernando (2004) find higher target abnormal returns where the target is
small relative to the size of the bidder. Danbolt (1995) and Francis et al. (2008) find large cross-border bidders
to perform better than smaller ones.
12
The available data from Amadeus/Zephyr database classify the transactions as acquisitions, joint ventures
and institutional buy-outs. Based on that information we hypothesize that (cross-border) acquisitions create more
value than other types of international transactions (JVs and IBOs in our case).
13
While Franks and Harris (1989) find target shareholders to gain more where bidders hold a large stake in
the target prior to the acquisition, Sudarsanam et al. (1996) find pre-bid stakes to have a significant negative
impact on target abnormal returns.
21
As discussed in section 2, the legal origin and the quality of the laws and enforcement of
shareholder rights as well as the quality of accounting standards in various countries may
affect the impact of cross-border acquisitions on shareholder wealth. Market access and
exchange rate effects, as well as differential tax treatment and company location effects can
also be expected to have a significant impact on abnormal returns from international
acquisitions. In this section we explore the impact of these factors on target and bidder wealth
effects.
Regression output from the cross-sectional analysis of target and bidder abnormal returns is
presented in Table 7. The results are generally supportive of our hypotheses regarding the
marginal effect of corporate governance differences on target and bidder abnormal returns
around the bid announcement. The results for target firms are reported in columns 1 through 4
of Table 7. Bris and Cabolis (2008) find that improvements in accounting standards induced
by consolidation in cross-border mergers are associated with larger premium. Danbolt and
Maciver (2012) find the difference in bidder and target country accounting quality to have a
significant positive impact on target cross-border effects, but when extending their analysis to
a multivariate model which incorporates target nationality as well as other firm and bid
characteristics, the coefficient on accounting quality shows small and statistically
insignificant. Similarly, we find that the impact of accounting standards on target abnormal
returns is not statistically significant (see Model 4). Similarly, the impact of the anti-selfdealing index is not robust to controlling for bid characteristics, with coefficient estimate
positive but insignificant (see Model 1).
Turning to the impact of other corporate governance proxies, we find significant results for
both legal origin and investor protection in home country. As argued by Martynova and
Renneboog (2008), English legal origin countries provide the highest quality of shareholder
protection and we also find a positive and significant effect of legal origin when controlling
for different bid characteristics (see Model 3). Also, we find strong results for the impact of
overall level of shareholder protection, which combines the effect of anti-director rights and
the rule of law (see Model 2), with target abnormal returns higher where the bidder country
offers shareholders stronger rights and protection than those available in the target country.
Our results are consistent with those of Bris and Cabolis (2008) and Danbolt and Maciver
(2012) for the UK market. As can be seen from Table 7, these results are robust to controlling
for different bid characteristics. However, while we find differences in the levels of
shareholder protection to have a strong impact on target abnormal returns, we do not observe
a strong location effect; the announcement abnormal returns are not significantly different for
CE targets and UK/Irish targets. Similarly to Danbolt and Maciver (2012), we also find a
significant and negative size effect, with large targets earning lower abnormal returns than
smaller firms. As expected, type of transaction and the size of the stake held by the bidder in
the target prior to the bid announcement are important determinants of target abnormal
returns. However, neither the exchange rate volatility nor differential tax systems are found to
have a significant impact on target abnormal returns. The results in Table 7 show that targets
from countries that belong to EFTA are able to earn higher abnormal returns.
The cross-sectional regressions of bidder returns are also reported in Table 7 (see columns 5
through 8). We find none of the corporate governance proxies to have a significant impact on
bidder abnormal returns. This result is consistent with Martynova and Renneboog (2008) and
Danbolt and Maciver (2012) who find that cross-border acquisitions create more value when
the bidder comes from a country with stronger shareholder protection than that of the target
country, but with the additional gains being reflected in the target returns, rather than in the
abnormal returns to bidders (see also Table 5, Panel C). Similarly, we find firm and bid
characteristics to have a significant impact on bidder abnormal returns, with bidders gaining
22
more when paid in cash, if the bidding company is large in size, and when the bidder currency
is appreciating against the target currency in the year prior to the bid announcement.
However, we do not find evidence that large cross-border acquisitions earn higher bidder
abnormal returns (CB variable is insignificant in all model specifications). None of the other
control variables appear to have a significant impact on the bidding company abnormal
returns. We may conclude that the results for the bidders are generally weak, which confirms
our hypothesis that that the differences in wealth effects between the bidder and the target
firm shareholders are due to differences in corporate governance systems rather than
differences in firm and bid characteristics.
[Insert Table 7 Here]
5.4 Determinants of combined abnormal returns (alternative hypothesis)
Kuipers et al. (2009) find that corporate governance proxies help to explain variation in
bidder abnormal returns for a sample of 181 tender offers over the period 1982–1991.
According to their interpretation, the results suggest that governance structure affects
managerial incentives when making M&A decisions. In other words, bidders from countries
with inferior governance systems have a greater tendency to make value-reducing
acquisitions. Consistent with this hypothesis, the study finds that the combined returns of
bidders and targets are related to corporate governance proxies. In contrast, Starks and Wei
(2013) argue that corporate governance difference should affect the sharing of gains between
target and bidder shareholders, rather than affecting the overall M&A gains. In their study
Starks and Wei show that the gains to targets and bidders are related to the quality of the
bidder’s home country corporate governance practices, but in opposite directions. Similarly,
to differentiate our findings from the agency problem hypothesis, we examine the combined
announcement abnormal returns.
For our sample of 275 European acquisitions of publicly traded bidders and targets we
calculate the combined portfolio return as the weighted average abnormal return for the target
and the bidder using their respective market capitalizations prior to the deal announcement as
the weights. We then regress the combined returns on the set of explanatory variables
employed in the previous regressions. We use the same four measures of the corporate
governance – anti-self-dealing index of the home country, shareholder protection, legal
origin, and quality of accounting standards. The results reported in Table 8 show that a
significant relation exists between the combined portfolio return and the corporate
governance proxies. We also examine the marginal effect of corporate governance on the
combined returns of the two merging companies in case of stock offers. Unfortunately, none
of the corporate governance proxies is found to have a significant impact on the combined
abnormal returns when stock payment is used. This contradicts our last hypothesis that the
overall value creation will be decreasing with the difference in corporate governance between
the bidder and the target’s home countries in stock offers only. Actually, we find a
significantly negative effect of corporate governance measures on the combined abnormal
returns whether the method of payment is stock or cash. This result supports the agency
problem hypothesis in Kuipers et al. (2009). Finally, when we control for different firm and
bid characteristics, we do not find any significant effect on combined firm abnormal returns.
However, the results show a marginal effect of the exchange rate volatility; transactions
conducted during a period in which the bidder currency is depreciating against the target
currency yield a higher combined abnormal return. Finally, the combined returns are larger
when bidders come from countries that belong to EFTA.
23
[Insert Table 8 Here]
6 Conclusion
In this paper we examine the main determinants of takeover premiums paid by European
bidders, thereby adding to this relatively new literature on European M&As. According to the
previous research the differences in bid premiums can be explained by variations in corporate
governance structures. Using a sample of 275 public acquisitions initiated by large and
medium-sized European firms between 2003 and 2010, we address the question if European
targets earn higher bid premiums in cross-border than in domestic acquisitions. This issue has
received less attention in the empirical literature so far. We find target shareholders of both
domestic and cross-border acquisitions to earn significantly positive bid premiums, with the
target firm shareholders earning substantially greater premiums, approximately 5% greater, in
cross-border acquisitions. The difference in the target bid premiums between cross-border
and domestic acquisitions lies primarily in stock offers, consistent with previous findings of
Starks and Wei (2013) for the US market and Martynova and Renneboog (2006) for the
European market.
Previous research (Rossi and Volpin, 2004; Starks and Wei, 2013) finds that the differences
in bid premiums can be explained by variations in corporate governance structures. Although
we find the bid premiums to be larger in European cross-border acquisitions where the
method of payment is stock, our results do not provide further evidence of a significant effect
of corporate governance measures on the bid premium. The impact of corporate governance
differences between the bidder and the target’s home countries is not robust even when
controlling for different bid and target characteristics, with coefficient estimates positive but
insignificant. This result can be explained with the fact that European bidders acquire their
targets in countries with similar or better corporate governance standards (around 80% of all
transactions include targets from well-developed Western European countries and
UK/Ireland). Thus, we are unable to confirm the hypothesis that foreign bidders from
countries with inferior corporate governance and investor protection must pay more to acquire
a target firm (Starks and Wei, 2013).
In line with Danbolt and Maciver (2012) who document that the overall wealth creation is
significantly higher in cross-border acquisitions both into and out of the UK than in
comparable domestic acquisitions, we find target firms to earn higher announcement
abnormal returns than do bidding firms in both domestic and cross-border acquisitions. Our
empirical results show that bidder investors in Europe on average react negatively to the
merger announcement of a listed target firm. The cross-sectional analysis of target and bidder
abnormal returns shows that the differences in corporate governance quality may explain the
larger announcement abnormal returns accrued to the target shareholders. These results are
robust to controlling for different bid characteristics. For example, target shareholders are
gaining more when paid in cash, if their company is small in size, or the acquiring firm owns
shares in the target firm prior to the bid announcement. Surprisingly, we find that target firms
are able to earn higher abnormal return in transactions different from acquisitions. We
observe an opposite effect for bidders; none of the corporate governance proxies appear to
have a significant impact on bidder abnormal returns whereas the impact of stock payment,
firm size and exchange rates volatility is significant in all model specifications. Thus, our
results are, in general, consistent with those of Bris and Cabolis (2008) and Danbolt and
Maciver (2012) for the UK market.
24
Kuipers et al. (2009) find that corporate governance proxies help to explain variation in
bidder abnormal returns for a sample of 181 tender offers over the period 1982–1991.
According to their interpretation, the results suggest that governance structure affects
managerial incentives when making M&A decisions. In other words, bidders from countries
with poor governance systems have a greater tendency to make value-reducing acquisitions.
Moreover, their theoretical development yields the implication that the corporate governance
impact on merger value should not be related to the method of payment. Thus, their
hypothesis does not have implications for the proportion of mergers conducted with stock or
cash. Our results confirm this hypothesis. Except for the quality of accounting standards, all
of the corporate governance measures show a significant (negative) impact on the combined
portfolio returns whether the method of payment is cash or stock. This result contradicts
Starks and Wei (2013) finding that corporate governance system of the bidder’s home country
does not matter for the combined returns but supports the managerial entrenchment
hypothesis in Kuipers et al. (2009).
The study has strong implications for European managers and their financial decisions. The
results suggest that they should pay attention to M&A announcement effects and the method
of payment used in cross-border acquisitions, especially in less developed European markets,
as such information can be used in developing profitable acquisition strategies. There are also
some implications for policymakers initiating reforms directed to overcoming the differences
in takeover regulations. The fact that the marginal impact of changes in institutional factors
on value creation can be different across different regions in Europe, asks for a careful
assessment of those factors before implementing the necessary changes in regulations. We do
believe the research can be improved if we extend our analysis to other target countries
outside Europe (e.g., the US, Canada, Japan, etc.). Moreover, previous studies conducted on
cross-border acquisitions investigate the issue mainly through the bidder or target abnormal
returns achieved on well developed markets such as the US and the UK. We intend to
investigate and compare the cross-border effects across different regions such as the
US/Canada, the UK/Ireland and Continental Europe
25
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http://www.kpmg.com/Global/en/services/Tax/tax-tools-and-resources/Pages/corporate-taxrates-table.aspx [accessed May 6, 2014].
29
Table 1
Sample description
This table describes the 2003-2010 sample of cross-border and domestic acquisitions obtained from
the Amadeus/Zephyr database. The transaction needs to be completed by a public bidder traded on a
European Stock Exchange. Only the transactions where majority stake is acquired are included in the
sample. Panel A represents the distribution of cross-border and domestic acquisitions across
announcement years. Panel B lists the distribution by country of origin. Panel C represents the
distribution by industry. In panel D we represent the activity relatedness of the bidder and target
according to the SIC codes. We distinguish between related activities, that is, companies have 4-digit
or 3-digit or 2-digit in common; activities are unrelated otherwise.
Panel A: Distribution of cross-border and domestic acquisitions across announcement years
Number of cross-border
Number of domestic
Total number of
acquisitions
acquisitions
acquisitions
2003
9
21
30
2004
6
18
24
2005
10
26
36
2006
6
32
38
2007
13
25
38
2008
8
31
39
2009
3
36
39
2010
5
26
31
Total
60
215
275
Panel B: Distribution by country of origin
Number of acquirers
United Kingdom
78
France
32
Germany
25
Sweden
17
Russian Federation
16
Poland
14
Italy
14
Switzerland
13
Spain
11
Norway
7
Finland
7
Austria
6
Denmark
5
Greece
5
Netherlands
5
Belgium
4
Cyprus
3
Bulgaria
2
Slovenia
2
Ireland
2
Turkey
1
Croatia
1
Czech Republic
1
Iceland
1
Romania
1
Switzerland
1
Gibraltar
1
Total
275
30
Number of targets
86
31
21
19
16
13
10
14
9
11
6
3
6
4
4
5
4
2
2
1
2
1
1
1
1
0
0
275
Total
164
63
46
36
32
27
24
27
20
18
13
9
11
9
9
9
7
4
4
3
3
2
2
2
2
1
1
550
Panel C: Distribution by industry
SIC codes
01-09 Agriculture,
Forestry & Fishing
10-14 Mining
15-17 Construction
20-39 Manufacturing
40-49 Transportation,
Communications, Electric,
Gas & Sanitary Services
50-51 Wholesale Trade
52-59 Retail Trade
60-67 Finance, Insurance
& Real Estate
70-89 Services
91-99 Public
Administration
Not Classified
Total
Domestic
Cross-border
Acquirer
Target
Acquirer
Target
0
1
0
25
0
1
2
21
0
16
5
36
0
9
6
53
6
3
4
8
1
4
38
8
5
33
6
4
3
17
2
20
59
46
53
50
1
0
60
0
1
60
2
0
215
1
0
215
Panel D: Activity relatedness
Same industry (4-digit)
Highly related industry (3digit)
Related industry (2-digit)
Unrelated industry
(remainder of events)
Total
Cross-border
19
Domestic
49
Total
68
4
6
15
36
19
42
31
60
115
215
146
275
31
Table 2
Comparison of deal characteristics
This table provides comparisons of deal characteristics across different types of transactions. The
characteristics and differences between domestic and cross-border deals are shown in Panel A and
between cash and non-cash deals within cross-border acquisitions in Panel B. The characteristics shown
are the percentage of deals that are cross-industry, pure cash offers, type of transaction – acquisitions,
mergers, or institutional buy-outs (IBOs), and the average value of the acquisitions (in EUR million). A
standard t-test is used to test the significance of differences in deal characteristics and the difference in
deal values. Panel C shows the bid premiums for target shareholders in domestic and cross-border
acquisitions. The bid premium is calculated as the percentage premium of the deal value to the target
firm’s market capitalization one week prior to the original announcement date. Bid premiums for the
subsamples of stock and cash acquisitions are presented as well. The last column in Panel C shows tstatistics for the differences in bid premiums across domestic and cross-border acquisitions, while the
bottom row shows t-statistics for the differences in takeover premiums across cash and stock deals.
Panel A: Domestic versus cross-border acquisitions
Domestic
Cross-border
N=215
N=60
Cross-industry
32.09%
33.33%
Cash
34.42%
70.00%
Acquisitions
98.60%
100.00%
Mergers
0.93%
0.0%
IBOs
0.47%
0.0%
Value of deal
654.706
729.932
Difference
(t-stat)
-0.18
-5.24***
-1.74**
1.42
1.00
-0.23
Panel B: Cash versus stock cross-border acquisitions*
Stock offers
Cash offers
N=11
N=43
Cross-industry
54.55%
28.57%
Acquisitions
100%
100%
Mergers
0.0%
0.0%
IBOs
0.0%
0.0%
Cross-listed
n/a
n/a
Value of deal
350.985
879.277
Difference
(t-stat)
1.51
---n/a
-1.76*
*The total number of cross-border acquisitions is less than 60 as there are missing data for some
deals.
Panel C: Takeover premiums for domestic and cross-border acquisitions
Domestic
Cross-border
Difference
N=
Premium
N=
Premium
(t-stat)
Full sample
93
15.88%
30
20.23%
-2.39**
Cash offers
40
4.66%
21
4.75%
-0.01
Stock offers
53
26.31%
9
56.34%
-1.73**
Difference (t-stat)
-2.72**
-2.65**
32
Table 3
Regression analysis of takeover premiums controlling for target characteristics
The table presents the results of regressions of takeover premium to target firms on the corporate governance proxies. The bid premium is
calculated as the percentage premium of the deal value to the target firm’s market capitalization prior to the original announcement date. CGP
variable is a proxy for governance/investor protection including anti-self-dealing index of the bidder/target country (GOV), shareholder
protection (SP), legal origin (LEG_ORIG), and quality of accounting standards (ACC_STAND). To account for any cross-border effect we use
dummy variable (CB) that equals 1 if the transaction is a cross-border acquisition, and zero otherwise. Control variables used in the analysis
are: Method of payment (cash-only, CASH, or stock-only, STOCK), Relative size of the deal (REL_SIZE), Acquiring firm size (A_SIZE), Type
of the transaction (TYPE), Percentage of shares in the target company prior to the bid (STAKE), Activity relatedness (DIVERSIFYING),
Exchange rate volatility (EX_RATE), and Tax differential (TAX). We also control for target firm characteristics including market-to-book ratio
(M/B), logged value of total assets (Assets) and return on assets (ROA). Figures in parentheses are the p-values. *, **, *** refer to 10%, 5%
and 1% significance levels.
Explanatory variables
Intercept
CB
GOV(delta)
Model 1
2.856
(0.264)
.205**
(0.021)
1.143
(0.441)
SP(delta)
Model 2
3.367
(0.269)
.343**
(0.044)
Model 3
3.090
(0.256)
.237*
(0.059)
REL_SIZE
A_SIZE
TYPE
Model 6
4.549
(0.273)
.325**
(0.014)
.701
(0.405)
.878
(0.197)
1.238*
(0.105)
-.009
(0.237)
-.206*
(0.066)
.007
.872
(0.193)
1.250*
(0.107)
-.009
(0.232)
-.210*
(0.061)
.009
Model 7
4.029
(0.258)
.350*
(0.062)
Model 8
3.935
(0.253)
.406**
(0.037)
.340
(0.445)
ACC_STAND(delta)
STOCK
Model 5
3.814
(0.257)
.258**
(0.017)
.979
(0.454)
.280
(0.486)
LEG_ORIG(delta)
CASH
Model 4
2.933
(0.252)
.339*
(0.087)
.890
(0.196)
1.234
(0.105)
-.010
(0.229)
-.209*
(0.063)
.003
.489
(0.470)
.028
(0.449)
.881
(0.195)
1.236*
(0.104)
-.010
(0.230)
-.207*
(0.105)
.004
33
.082
(0.693)
1.382*
(0.104)
-.007
(0.362)
-.107
(0.468)
.103
.807
(0.223)
1.411*
(0.107)
-.006
(0.397)
-.103
(0.496)
.092
.833
(0.221)
1.387*
(0.105)
-.007
(0.344)
-.116
(0.427)
.085
.021
(0.505)
.824
(0.221)
1.389*
(0.104)
-.007
(0.351)
-.112
(0.450)
.080
STAKE
DIVERSIFY
EX_RATE
TAX
(0.967)
-1.632*
(0.086)
-1.476
(0.325)
-1.720
(0.784)
-.926
(0.575)
(0.958)
-1.713*
(0.097)
-1.440
(0.326)
-2.505
(0.700)
-1.440
(0.457)
(0.984)
-1.645*
(0.087)
-1.468
(0.322)
-1.740
(0.785)
-1.163
(0.502)
(0.981)
-1.658*
(0.089)
-1.440
(0.324)
-2.529
(0.711)
-1.033
(0.527)
105
(0.708)
-1.624*
(0.083)
-1.491
(0.335)
-4.511
(0.541)
-2.193
(0.345)
.174
(0.485)
-.347
(0.331)
.357
(0.804)
90
(0.734)
-1.711*
(0.092)
-1.485
(0.336)
-4.792
(0.495)
-2.968
(0.338)
.207
(0.453)
-.375
(0.330)
.532
(0.710)
90
(0.748)
-1.619*
(0.083)
-1.482
(0.333)
-4.823
(0.538)
-2.399
(0.335)
.199
(0.468)
-.350
(0.334)
.376
(0.792)
90
(0.760)
-1.634*
(0.084)
-1.463
(0.334)
-5.357
(0.509)
-2.341
(0.329)
.198
(0.468)
-.357
(0.331)
.460
(0.745)
89
107
107
107
0.0791
0.0785
0.0790
0.0782
0.0887
0.0892
0.0883
0.0879
M/B - target
Log(Assets) - target
ROA - target
Number of
observations
R-squared
34
Table 4
Comparison of target firm characteristics
This table presents comparisons of target characteristics as of the year prior to the deal announcement
year across different types of acquisitions. The target characteristics shown are ROA (return on
assets), ROE (return on equity), sales, assets, market capitalization, market-to-book ratio, leverage
measured with book values and leverage measured with market values. Panel A shows the target
characteristics for domestic versus cross-border targets in which the medium of exchange is cash, and
Panel B – for domestic versus cross-border targets in which the medium of exchange is stock. Target
characteristics for cash versus non-cash offers for cross-border acquisitions only are presented in
Panel C. Last column in each panel shows t-statistics for the mean differences in target characteristics
between domestic and cross-border acquisitions, as well as for stock and cash offers in cross-border
deals.
Panel A: Cash offers
ROA
ROE
Sales (million EUR)
Assets (million EUR)
Market capitalization (million EUR)
M/B
Book leverage
Market leverage
Domestic
N=73
0.0313
0.1376
472.66
642.47
649.15
0.664
0.3419
0.0004
Cross-border
N=43
0.0575
0.1850
539.32
505.85
498.90
2.344
0.3976
0.0003
Difference
(t-stat)
-0.64
-0.51
-0.21
0.35
-0.27
-1.11
-0.25
0.68
Domestic
N=102
-0.0208
0.0083
331.07
534.97
339.97
1.046
0.6150
0.0018
Cross-border
N=11
-0.0429
-0.0689
434.15
478.56
417.77
0.052
1.5931
0.0103
Difference
(t-stat)
1.25
0.57
-0.37
0.12
-0.02
6.59***
-1.16
-0.95
Stock
N=11
-0.0429
-0.0689
434.15
478.56
417.77
0.052
1.5931
0.0103
Cash
N=43
0.0575
0.1850
539.32
505.85
498.90
2.344
0.3976
0.0003
Difference
(t-stat)
-2.01**
-3.02***
-0.31
-0.05
-0.46
-3.75***
1.40
78.44***
Panel B: Stock offers
ROA
ROE
Sales (million EUR)
Assets (million EUR)
Market capitalization (million EUR)
M/B
Book leverage
Market leverage
Panel C: Cross-border acquisitions
ROA
ROE
Sales (million EUR)
Assets (million EUR)
Market capitalization (million EUR)
M/B
Book leverage
Market leverage
35
Table 5
Cumulative announcement abnormal returns for bidders and targets
The table shows the cumulative announcement abnormal returns (CAARs) for the sample of 275 crossborder and domestic acquisitions. The table reports the cumulative abnormal returns over 3-day (t-1,
t+1) and 11-day (t-5, t+5) event windows for the target (Panel A), the bidder (Panel B), and the
combined firms (Panel C), respectively. We also present the average wealth effects for the subsample
of deals initiated by Continental European or UK/Irish firms and the difference between them (CEUK/Irish). The combined CAAR is calculated as the weighted average of the target abnormal returns
and the acquirer abnormal returns, weighted by the corresponding market capitalization of the
respective company prior to the deal announcement. The table reports the value of the test statistics,
MP(t), as well as the percentage of positive CAARs for each subsample. *, **, *** refer to 10%, 5%
and 1% significance levels, respectively, from a MP(t) test of the mean and a z-test of the median. A ttest is used to test the significance of mean differences in cross-border and domestic abnormal returns,
and a Wilcoxon matched-pairs signed-ranks test of the differences in medians (the null hypothesis is
that the two samples have equal medians.) A simple sign test is used to test whether the proportion of
positive abnormal returns is significantly different from 50%.
Panel A: Target returns
3-day CAAR (t-1, t+1)
Cross-border
Domestic
Difference
Mean
7.34%
4.50%
2.84%
MP(t)
13.92***
13.70***
1.72*
Median
0.64%
0.48%
0.16%
z-test
3.05**
3.93***
0.27
St. Dev
13.82%
13.01%
14.69%
Positive
58.33%
58.14%
54.55%
11-day CAAR (t-5, t+5)
Cross-border
Domestic
Difference
7.97%
6.98%
0.99%
7.95***
10.67***
0.32
2.30%
1.33%
0.97%
3.25**
3.97***
-0.10
17.83%
17.67%
30.75%
66.67%
50.27%
48.48%
Panel B: Bidder returns
3-day CAAR (t-1, t+1)
Cross-border
Domestic
Difference
Mean
0.13%
-0.08%
0.21%
MP(t)
-0.03
-1.21
0.30
Median
-0.59%
-0.04%
-0.55%
z-test
-1.50
-0.40
-0.24
St. Dev
4.09%
5.43%
7.06%
Positive
41.51%
47.28%
40.00%
11-day CAAR (t-5, t+5)
Cross-border
Domestic
Difference
-0.52%
-0.35%
-0.17%
-1.00
-0.79
-0.15
-0.85%
-0.31%
-0.54%
-1.32
-0.67
-0.99
6.41%
9.72%
10.40%
39.62%
46.74%
42.22%
Panel C: Target, bidder and combined returns
3-day CAAR (t-1, t+1)
Total
Target
Bidder
Combined
Mean
5.12%
-0.04%
2.94%
MP(t)
18.62***
-1.08
3.92***
Median
0.48%
-0.08%
0.0001%
z-test
4.94***
-0.93
1.72*
St. Dev
13.22%
5.15%
0.17%
Positive
58.18%
45.99%
52.27%
11-day CAAR (t-5, t+5)
Target
Bidder
Combined
7.20%
-0.38%
2.87%
13.15***
-1.17
1.91*
1.68%
-0.59%
0.001%
5.05***
-1.14
2.04**
28.01%
9.07%
0.33%
59.64%
45.15%
62.92
36
Panel D: Return by regions
3-day CAAR (t-1, t+1)
Regions
Target
Bidder
Combined
Cont. Europe
4.29%
0.61%
1.77%
MP(t)
11.88***
1.81*
2.24**
UK/Ireland
6.95%
-1.43%
5.17%
MP(t)
15.68***
-4.58***
2.66***
Difference
CE-UK/Irish
-2.66%
2.04%
-3.40%
(t-stat)
-1.66*
2.77***
-1.25
37
11-day CAAR (t-5, t+5)
Target
Bidder
Combined
6.47%
0.23%
1.01%
9.30***
0.34
0.53
8.80%
-1.70%
13.90%
9.73***
-2.57**
2.17**
-2.33%
-0.75
1.93%
1.38
-12.89%
-1.52
Table 6
Bid characteristics and their impact on cumulative abnormal returns
The table reports the sample characteristics for targets and bidders in 275 cross-border and domestic
acquisitions by large and medium-sized European firms during 2003-2010, and the significance of
mean differences in bid characteristics. Relative size of the target to the bidder (measured by their total
assets) is not available for all sample firms. Panel A reports the bid characteristics: payment (cash-only
or equity-only), company size, relative size, type of the deal (acquisition or merger), stake and industry
diversification for targets and bidders. A t-test is used to test the significance of mean differences in
cross-border and domestic abnormal returns. Panel B reports Pearson correlations between 3-day
market-model cumulative announcement abnormal returns and the various bid characteristics. The
analysis is based on the sample of 275 targets and 237 bidders. Variables are as defined in the
Appendix A.
Panel A: Bid characteristics
Targets
Bidders
Difference
(t-stat)
Cross-border
Domestic
Difference
(t-stat)
0.736
0.151
0.359
0.484
5.34***
-5.38***
0.40
14.579
12.849
4.56***
0.238
-1.72*
0.187
0.247
-1.07
1.000
0.986
1.74**
1.000
0.984
1.74**
Stake
Stake, %
0.047
0.050
-0.18
0.053
0.055
-0.12
Relatedness
Diversifying
0.683
0.772
-1.32
0.698
0.793
-1.36
Cross-border
Domestic
Payment
Cash only
Stock only
0.700
0.183
0.344
0.474
5.24***
-4.78***
Company size
Ln(MV)
11.298
11.071
Relative size
TA(T)/TA(B)
0.185
Type of deal
Acquisition
Panel B: Correlation between cumulative abnormal returns and bid characteristics
Targets
Bidders
Cross-border
Domestic
Cross-border
Domestic
Payment
Cash only
0.0064
0.0567
-0.2999**
0.1029
Stock only
-0.0196
-0.0703
-0.4351***
-0.1912***
Company size
Ln(MV)
-0.0848
-0.0314
-0.0138
0.1217
Relative size
TA(T)/TA(B)
-0.3070*
-0.1013
0.4414**
0.0660
n/a
-0.0294*
n/a
-0.0223
-0.1659*
-0.1005**
0.0483
-0.0854
Type of deal
Acquisition
Stake
Stake, %
Relatedness
38
Diversifying
-0.0127
-0.0747
0.0225
39
-0.0220
Table 7
Regression analysis of targets' and bidders' cumulative abnormal returns
The table presents cross-sectional regression results for the analysis of the target and bidder cumulative abnormal returns with CAR estimated
over 3-day (-1, +1) event window around the announcement using the market model. To control for investor protection we use a proxy for
governance/investor protection including anti-self-dealing index of the bidder/target country (GOV), shareholder protection (SP), legal origin
(LEG_ORIG), and quality of accounting standards (ACC_STAND). To account for any cross-border effect we use dummy variable (CB) that
equals 1 if the transaction is a cross-border acquisition, and zero otherwise. Control variables used in the analysis are: Method of payment
(cash-only, CASH, or stock-only, STOCK), Relative size of the deal (REL_SIZE), Merging firms size (FIRM_SIZE), Type of the transaction
(TYPE), Percentage of shares in the target company prior to the bid (STAKE), Activity relatedness (DIVERSIFY), Exchange rate volatility
(EX_RATE), and Tax differential (TAX). Dummy variables for each year, type of the region, and membership to EFTA are also included.
Figures in parentheses are the p-values. *, **, *** refer to 10%, 5% and 1% significance levels.
Explanatory variables
Intercept
CB
GOV
Model 1
.625**
(0.036)
.047*
(0.062)
.012
(0.933)
SP
Targets
Model 2
Model 3
.652**
.608**
(0.020)
(0.034)
.051*
.033*
(0.076)
(0.086)
Model 4
.618**
(0.027)
.070**
(0.022)
.013**
(0.035)
LEG_ORIG
STOCK
.037
(0.712)
TYPE
Model 8
-.034
(0.720)
-.001
(0.998)
.010
(0.456)
.011
(0.645)
-.013
(0.623)
.011
(0.752)
-.0137
(0.658)
.011
(0.742)
-.013
(0.659)
.005*
(0.062)
.013
(0.721)
-.014
(0.657)
-.028*
(0.040)
-.181***
-.028**
(0.042)
-.183***
-.028**
(0.044)
-.717***
-.029**
(0.042)
-.186***
REL_SIZE
FIRM_SIZE
Bidders
Model 6
Model 7
-.022
-.031
(0.730)
(0.749)
-.001
-.001
(0.949)
(0.950)
.006
(0.517)
ACC_STAND
CASH
Model 5
-.033
(0.740)
-.004
(0.768)
.003
(0.867)
40
-.018
(0.264)
- .033*
(0.051)
.001
(0.897)
.010*
(0.068)
-.001
-.018
(0.254)
-.032*
(0.054)
.001
(0.886)
.010*
(0.066)
-.001
-.017
(0.273)
-.032*
(0.054)
.001
(0.912)
.010*
(0.067)
-.001
.001
(0.303)
-.017
(0.270)
-.032*
(0.054)
.001
(0.929)
.011
(0.065)
-.001
STAKE
DIVERSIFY
EX_RATE
TAX
D_TIME
D_REGION
D_EFTA
Number of observations
R-squared
(0.000)
-.268***
(0.003)
-.043
(0.314)
-.621
(0.566)
-.258
(0.309)
Yes
-.023
(0.447)
.079**
(0.015)
130
0.1836
(0.000)
-.272***
(0.005)
-.045
(0.302)
-.600
(0.551)
-.280
(0.2038)
Yes
-.025
(0.405)
.080**
(0.017)
130
0.1844
(0.000)
-.271***
(0.004)
-.041
(0.354)
-.712
(0.510)
-.245
(0.300)
Yes
-.017
(0.565)
.077**
(0.019)
130
0.1852
(0.000)
-.265***
(0.003)
-.049
(0.257)
-.505
(0.579)
-.239
(0.319)
Yes
-.033
(0.284)
.082**
(0.013)
129
0.1946
(0.954)
-.037
(0.285)
-.008
(0.475)
.537**
(0.012)
.060
(0.516)
Yes*
.001
(0.967)
.004
(0.744)
112
0.1582
*The coefficient estimates of year dummies (2004 – 2010) are statistically significant at the usual levels of significance.
41
(0.939)
-.038
(0.251)
-.008
(0.468)
.561**
(0.012)
.048
(0.559)
Yes*
.001
(0.964)
.004
(0.717)
112
0.1600
(0.940)
-.037
(0.276)
-.008
(0.478)
.558**
(0.010)
.057
(0.515)
Yes*
.001
(0.949)
.004
(0.735)
112
0.1605
(0.932)
-.034
(0.278)
-.008
(0.466)
.590***
(0.008)
.060
(0.486)
Yes*
.001
(0.951)
.004
(0.737)
112
0.1631
Table 8
The effect of corporate governance on combined abnormal returns of target and bidder
This table provides the results of weighted-least square regressions of the combined target and bidder announcement abnormal returns on four
corporate governance proxies. The dependent variable is the combined abnormal return on the target and the bidder over the period of (-1, +1)
days surrounding the deal announcement. CGP variable is a proxy for governance/investor protection measures including anti-self-dealing
index of the target/bidder country (GOV), shareholder protection (SP), legal origin (LEG_ORIG), and quality of accounting standards
(ACC_STAND). We interact this proxy with dummy variable (STOCK) that equals 1 if the payment is made entirely with stock and zero
otherwise. Control variables used in the analysis are: Method of payment (cash-only, CASH, or stock-only, STOCK), Acquiring and target
firm size (A_SIZE and T_SIZE), Type of the transaction (TYPE), Percentage of shares in the target company prior to the bid (STAKE,)
Activity relatedness (DIVERSIFY), Exchange rate volatility (EX_RATE), and Tax differential (TAX). Dummy variables for each year, type
of region and membership to EFTA are also included. Figures in parentheses are the p-values. *, **, *** refer to 10%, 5% and 1%
significance levels. The weights are the standard deviations of the residual from the pre-event regression estimation.
Explanatory variables
Intercept
CB
CGP
Model 1
GOV
-0.282
(0.421)
0.034
(0.619)
-0.358**
(0.012)
CGP*STOCK
CASH
STOCK
T_SIZE
A_SIZE
TYPE
-0.011
(0.880)
0.001
(0.981)
-0.006
(0.796)
0.013
(0.561)
-0.017
(0.905)
Model 2
GOV
-0.280
(0.423)
0.034
(0.621)
-0.359**
(0.013)
0.008
(0.985)
-0.013
(0.762)
-0.006
(0.799)
0.013
(0.571)
-0.018
(0.903)
Model 3
SP
-0.458
(0.213)
0.073*
(0.061)
-0.095**
(0.034)
-0.010
(0.892)
0.003
(0.962)
-0.003
(0.886)
0.014
(0.535)
-0.021
(0.890)
Model 4
SP
-0.411
(0.261)
0.085*
(0.096)
-0.112**
(0.021)
0.088
(0.360)
-0.011
(0.795)
-0.001
(0.955)
0.009
(0.693)
-0.027
(0.857)
42
Model 5
LEG_ORI
G
-0.388
(0.263)
0.026
(0.685)
-0.270***
(0.003)
-0.017
(0.815)
0.0006
(0.992)
-0.001
(0.949)
0.011
(0.607)
-0.023
(0.873)
Model 6
LEG_ORI
G
-0.387
(0.260)
0.026
(0.684)
-0.270***
(0.003)
-0.005
(0.986)
-0.018
(0.666)
-0.001
(0.948)
0.012
(0.611)
-0.02
(0.873)
Model 7
ACC_STA
ND
-0.291
(0.430)
0.112*
(0.102)
-0.003
(0.490)
-0.011
(0.882)
0.004
(0.953)
-0.007
(0.793)
0.018
(0.458)
-0.021
(0.892)
Model 8
ACC_STA
ND
-0.279
(0.443)
0.113*
(0.101)
-0.003
(0.548)
-0.010
(0.646)
-0.015
(0.731)
-0.008
(0.753)
0.020
(0.413)
-0.017
(0.910)
STAKE
DIVERSIFY
EX_RATE
TAX
D_TIME
D_REGION
D_EFTA
Number of observations
R-squared
-0.139
(0.260)
0.023
(0.563)
-2.153*
(0.071)
-0.277
(0.334)
Yes
-0.023
(0.558)
0.189**
(0.044)
96
0.0988
-0.138
(0.252)
0.023
(0.565)
-2.118
(0.309)
-0.276
(0.335)
Yes
-0.023
(0.549)
0.189**
(0.044)
96
0.0988
-0.099
(0.433)
0.012
(0.758)
-1.974*
(0.100)
-0.444
(0.143)
Yes
-0.028
(0.482)
0.177*
(0.063)
96
0.0720
-0.098
(0.424)
0.014
(0.725)
-1.221*
(0.096)
-0.408
(0.178)
Yes
-0.025
(0.518)
0.183*
(0.054)
96
0.0845
43
-0.128
(0.290)
0.025
(0.516)
-2.344**
(0.046)
-0.363
(0.199)
Yes
-0.024
(0.541)
0.190**
(0.038)
96
0.1363
-0.128
(0.282)
0.026
(0.524)
-2.380
(0.327)
-0.363
(0.205)
Yes
-0.024
(0.533)
0.190**
(0.038)
96
0.1363
-0.135
(0.298)
0.001
(0.975)
-1.5981*
(0.102)
-0.287
(0.340)
Yes
-0.028
(0.505)
0.191**
(0.051)
96
0.0096
-0.140
(0.272)
0.006
(0.873)
-2.640
(0.310)
-0.267
(0.378)
Yes
-0.028
(0.495)
0.190*
(0.052)
96
0.0129
Appendix A
Variables description
This table describes the explanatory variables used in the regression analysis
Variables
Bid characteristics
TYPE
CASH/STOCK
REL_SIZE
Firm characteristics
FIRM_SIZE
STAKE
Industry characteristics
RELATEDNESS
Explanation
Source
Type of transaction: Variable taking value 1 if the transaction
is defined as an acquisition, and 0 otherwise
Method of payment: variable taking value 1 for cash-only
deals, and 0 for stock-only deals
Relative size of the deal: Ratio between purchase price and
acquirer’s market capitalisation in the announcement day.
Zephyr
Zephyr,
Bloomberg
Zephyr,
Bloomberg
Firm size: Log of Market value of acquirer/target
The size of any pre-bid holding of shares by the bidder in the
target prior to the acquisition announcement (in percentage)
Datastream
Zephyr
Dummy variable taking the value 1 where the target and the
bidder companies have different four-digit primary SIC
codes, and 0 otherwise.
Zephyr,
Datastream
Country characteristics
GOV
Anti-self-dealing index of the bidder/target country
calculated by Djankov et al. (2008)
Anti-Director Rights
Countries are scored on a scale from 0 to 6, with points
awarded for whether the country allows shareholders to
submit proxy votes by mail; where shareholders are not
required to deposit their shares prior to the AGM, etc.
Rule of Law
Countries are scored on a scale from 0 to 10 based on an
assessment of the law and order tradition by the country
undertaken by the International Country Risk (ICR) riskrating agency
Shareholder Protection Countries are scored on a scale from 0 to 5 on the effective
(SP)
rights of minority shareholders, calculated as (Rule of Law *
Anti-Director Rights)/10
Accounting Standards
An index (out of 90) of accounting quality created by the
(ACC_STAND)
Centre for International Financial Analysis and Research,
based on an assessment of the country's average quality of
annual reports.
Legal origin
Dummy variable taking the value 1 if the company is
(LEG_ORIG)
originating from a country with English common law legal
system, and 0 otherwise.
EX_RATE
The percentage change in the exchange rate between the
bidder and target country’s currencies over the twelve
months prior to the date of the bid announcement. A positive
value of the exchange rate change variable indicates that the
currency of the bidder has strengthened during the year
leading up to the date of the bid announcement.
TAX
Tax differential that measures the ratio of the marginal taxes
of the target country to the bidder’s.
CB
Dummy variable taking value 1 if the deal is a cross-border
acquisition, and 0 otherwise.
Dummies:
TIME
Dummy variable taking value 1 if the deal is announced in a
44
Djankov et al.
(2008)
La Porta et
al. (1998)
La Porta et
al. (1998)
La Porta et
al. (1998)
La Porta et
al. (1998)
La Porta et
al. (1998)
Datastream
KPMG's Tax
Surveys (2014)
Zephyr
Zephyr
REGION
EFTA
specific year of the 2003-2010 period, and 0 otherwise.
Dummy variable taking value 1 if the target (bidder) firm is
located in Continental Europe, and 0 otherwise.
Dummy variable taking value 1 if target (bidder) firm
belongs to the European Free-Trade Area (EFTA), and 0
otherwise.
45
Zephyr
Zephyr
Appendix B
Correlation matrix of model variables
The variables of main interest in our analysis are: Type of transaction (TYPE), Method of payment (cash-only, CASH, or stock-only, STOCK), Relative
size of the deal (REL_SIZE), Acquiring firm size (A_SIZE), Percentage of shares in the target company prior to the bid (STAKE), Activity relatedness
(DIVERSIFY), Anti-self-dealing index of the target and bidder country (GOV), Shareholders protection index (SP) of the target and the bidder country,
Quality of accounting standards of home country (ACC_STAND), Legal origin of home country (LEG_ORIG), Exchange rate volatility (EX_RATE), Tax
differential (TAX), and Cross-border dummy (CB). All variables are taken as ratios or in percentage. Dummy variables for time period, type of the region,
and membership to EFTA are excluded.
1
(1) TYPE
(2) CASH
(3) STOCK
(4) REL_SIZE
(5) A_SIZE
(6) STAKE
(7) DIVERSIFY
(8) GOV(target)
2
3
4
1.000
0.244***
-0.040
0.059
0.019
0.017
0.013
1.000
0.713***
0.072
0.055
0.045
-0.060
0.391***
0.012
0.080
1.000
-0.039
0.329***
0.045
-0.070
-0.071
0.056
0.106***
0.114
-0.080
-0.078
-0.084
-0.037
0.132**
0.092*
0.188***
0.022
0.047
0.127
0.071
0.078
-0.126**
-0.070
0.180***
0.073
-0.078
0.000
-0.004
-0.077
0.004
0.097
0.129
0.002
-0.002
0.056
0.298***
0.207***
0.013
-0.031
0.244***
1.000
0.007
-0.053
0.335***
0.414***
-0.068
-0.113
0.289***
0.482***
-0.112
-0.026
-0.048
0.309***
(13) LEG_ORIG
(14) EX_RATE
(15) TAX
(16) CB
6
7
8
9
10
1.000
0.038
1.000
-0.121**
0.046
1.000
-0.143**
-0.122**
-0.080
0.168***
0.039
0.056
0.033
11
12
0.829***
0.677***
0.571***
1.000
0.595***
0.677***
1.000
0.907***
1.000
0.076
0.516***
0.672***
0.652***
0.774***
1.000
-0.124**
-0.056
-0.013
0.020
-0.011
-0.146**
0.805***
0.027
-0.139**
0.663***
0.009
-0.084
0.785***
-0.069
0.117*
-0.007
-0.085
-0.117*
0.974***
-0.059
0.010
0.261***
0.012
-0.080
0.637***
-0.024
0.021
0.268***
13
14
15
1.000
-0.149**
1.000
-0.004
-0.067
16
1.000
(9) GOV(bidder)
(10) SP(target)
(11) SP(bidder)
(12) ACC_STAN
5
*
indicates that correlation is significant at the 10 percent level
indicates that correlation is significant at the 5 percent level
***
indicates that correlation is significant at the 1 percent level
**
46
1.000
-0.059
0.032
0.288***
1.000
Appendix C
Summary of sample statistics
The variables of main interest in our analysis are: Bid premium (PREMIUM), Type of transaction (TYPE), Method of payment (cash-only,
CASH, or stock-only, STOCK), Relative size of the deal (REL_SIZE), Acquiring and target firm size (A_SIZE and T_SIZE), Percentage of
shares in the target company prior to the bid (STAKE,) Activity relatedness (DIVERSIFY), Anti-self-dealing index of the bidder and the
target country (GOV), Shareholders protection index (SP) of the bidder and the target country, Quality of accounting standards
(ACC_STAND) of home country, Legal origin (LEG_ORIG) of home country, Exchange rate volatility (EX_RATE), Tax differential (TAX),
and Cross-border dummy (CB). Dummy variables for the region and membership to EFTA are also included.
Variable
Obs.
Mean
Median
PREMIUM
TYPE
CASH
STOCK
REL_SIZE
A_SIZE
T_SIZE
STAKE
DIVERSIFY
GOV(bidder)
GOV(target)
SP(bidder)
SP(target)
GOV(delta)
SP(delta)
ACC_STAND
LEG_ORIG
EX_RATE
TAX
CB
D_REGION
D_EFTA
140
275
275
275
138
138
141
275
275
251
252
251
252
272
272
230
275
275
252
275
275
275
0.4063
0.9891
0.4218
0.4109
0.9357
5.7722
4.7624
0.0494
0.7527
0.5308
0.5526
3.1137
3.1734
-0.0213
-0.0534
70.8261
0.2909
-0.0014
0.9984
0.2182
0.7164
0.0764
2.5540
0.1041
0.4948
0.4929
5.7785
1.0915
0.9669
0.1157
0.4322
0.2800
0.2818
1.1919
1.2033
0.1573
0.4969
8.0893
0.4550
0.0239
0.0553
0.4138
0.4516
0.2661
47
Standard
Deviation
0
1
0
0
0.1756
5.6869
4.6515
0
1
0.38
0.39
3.12
3.50
0.00
0.00
69.00
0
0
1
0
1.00
0.00
Minimum
Maximum
-0.9979
0
0
0
0.0002
3.3145
0.9216
0
0
0.21
0.21
0
0
-0.720
-2.285
51.00
0
-0.2420
0.7323
0
0
0
25.8562
1
1
1
67.6618
8.0577
7.5532
0.5
1
0.93
0.93
4.2850
4.2850
0.660
1.730
83.00
1
0.1269
1.3059
1
1
1
Appendix D
Regression analysis of takeover premiums using Heckman (1979) model
The table presents the results of Heckman (1979) selection model regressions of takeover premium to target firms on the corporate governance
proxies. The bid premium is calculated as the percentage premium of the deal value to the target firm’s market capitalization prior to the
original announcement date. CGP variable is a proxy for governance/investor protection including anti-self-dealing index of the bidder/target
country (GOV), shareholder protection (SP), legal origin (LEG_ORIG), and quality of accounting standards (ACC_STAND). To account for
any cross-border effect we use dummy variable (CB) that equals 1 if the transaction is a cross-border acquisition, and zero otherwise. Control
variables used in the analysis are: Method of payment (cash-only, CASH, or stock-only, STOCK), Relative size of the deal (REL_SIZE),
Acquiring firm size (A_SIZE), Type of the transaction (TYPE), Percentage of shares in the target company prior to the bid (STAKE,) Activity
relatedness (DIVERSIFY), Exchange rate volatility (EX_RATE), and Tax differential (TAX). We also control for target firm characteristics
including market-to-book ratio (M/B), logged value of total assets (Assets) and return on assets (ROA). Figures in parentheses are the p-values.
*, **, *** refer to 10%, 5% and 1% significance levels. The table shows coefficient estimates including that of inverse Mills ratio with p-values
below them.
Explanatory variables
Intercept
CB
GOV
Model 1
5.371
(0.293)
.449*
(0.061)
2.510
(0.411)
SP
Model 2
6.777
(0.323)
.901*
(0.073)
Model 3
6.075
(0.306)
.646*
(0.099)
REL_SIZE
A_SIZE
Model 6
8.385
(0.313)
1.037*
(0.058)
1.430
(0.397)
-2.254
(0.320)
3.316**
(0.023)
-.028
(0.316)
-.421*
(0.051)
-2.278
(0.327)
3.415**
(0.032)
-.029
(0.322)
-.467*
(0.071)
Model 7
6.659
(0.307)
1.286*
(0.084)
Model 8
6.489
(0.306)
1.513*
(0.075)
.831
(0.386)
ACC_STAND
STOCK
Model 5
6.154
(0.302)
.925*
(0.077)
2.226
(0.371)
.558
(0.443)
LEG_ORIG
CASH
Model 4
5.660
(0.303)
.946*
(0.088)
-2.289
(0.330)
3.318**
(0.032)
-.029
(0.328)
-.453*
(0.072)
.979
(0.389)
.052
(0.429)
-2.251
(0.328)
3.305**
(0.031)
-.029
(0.326)
-.455*
(0.082)
48
-2.464
(0.283)
4.467*
(0.099)
-.026
(0.260)
-.006
(0.977)
-2.420
(0.289)
4.567*
(0.098)
-.025
(0.255)
-.020
(0.931)
-2.498
(0.221)
4.469*
(0.094)
-.027
(0.269)
-.064
(0.715)
.035
(0.454)
-2.485
(0.288)
4.503*
(0.083)
-.026
(0.267)
-.038
(0.840)
TYPE
STAKE
DIVERSIFY
EX_RATE
TAX
InvMills_Ratio
.306
(0.476)
-5.440*
(0.060)
-3.268
(0.380)
-3.964
(0.688)
-3.559
(0.369)
3.756
(0.431)
.316
(0.480)
-5.739*
(0.069)
-3.313
(0.387)
- 2.274
(0.808)
-4.796
(0.381)
3.832
(0.437)
.258
(0.504)
-5.452*
(0.068)
-3.286
(0.386)
- 4.013
(0.690)
-4.165
(0.369)
3.715
(0.441)
.265
(0.501)
-5.403*
(0.058)
-3.235
(0.387)
-2.553
(0.798)
-3.747
(0.373)
3.680
(0.442)
107
0.0976
107
0.0979
107
0.0972
105
0.0961
M/B - target
Log(Assets) - target
ROA - target
Number of observations
R-squared
49
.595
(0.404)
-6.998**
(0.019)
-3.987
(0.348)
-3.333
(0.687)
-6.426
(0.340)
5.785
(0.368)
.611
(0.391)
-1.156
(0.348)
3.702
(0.343)
90
0.1323
.619
(0.401)
-7.481**
(0.022)
-4.062
(0.349)
-4.186
(0.591)
-8.704
(0.344)
5.932
(0.367)
.662
(0.384)
-1.222
(0.348)
4.208
(0.341)
90
0.1354
.513
(0.424)
-6.93*4*
(0.024)
-4.006
(0.352)
-3.672
(0.687)
-6.675
(0.344)
5.609
(0.375)
.658
(0.394)
-1.152
(0.354)
3.502
(0.352)
90
0.1313
.570
(0.414)
-6.996**
(0.023)
-4.003
(0.352)
-4.800
(0.627)
-6.602
(0.344)
5.716
(0.373)
.629
(0.393)
-1.172
(0.352)
3.475
(0.345)
89
0.1318
Figure 1
Cumulative Abnormal Returns
Panel A. Targets
Panel B. Bidders
50
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