International acquisitions in the united states: Evidence from returns to foreign bidders

Abstract

This paper provides evidence on the minimally explored topic of abnormal returns earned by stockholders of foreign bidders seeking to acquire a target firm in the USA. Four sources of influence on abnormal returns are identified: changes in net wealth of the bidder associated with changes in exchange rates; possible value‐destroying managerial discretionary behavior by bidders with excess cash flows, as suggested by Jensen; comparative advantages for foreign bidders domiciled in relatively favorable tax jurisdictions; ownership status of the target, i.e. whether the target is an entire firm and whether it involves divested assets. The study includes 77 firms from 10 countries. The results show that stockholders of foreign bidders earn significant, negative abnormal returns surrounding the announcement of an acquisition in the USA. These abnormal returns become increasingly negative over the 15 days after the announcement of the acquisition, indicating that more information about the acquisition is revealed to investors subsequent to the initial announcement. Cross‐sectional regressions indicate that relative exchange rates and cash positions explain variation in abnormal returns. A decline in the value of the dollar increases abnormal returns for the foreign bidder, thus supporting the net wealth hypothesis. The results also show that cash‐rich foreign firms tend to enjoy higher abnormal returns when making acquisitions in the USA. The result provides support for the Froot and Stein cash‐constrained hypothesis rather than for Jensen's free‐cash‐flow theory.

Determinants of Merger & Acquisition success in global logistics

“…However, due to cultural differences and large distances between headquarters, integration costs might be higher and counteract these benefits (see e.g. Mathur et al 1994or Hase 2002. Therefore, the potential differences in success are tested by dividing the sample into two groups with respect to the headquarter location of the involved corporations.…”

Wealth Effects of International Acquisitions by US Banks

“…We hypothesize that net income margin and fixed asset turnover would be positively associated with excess returns, while positive changes in total assets would be negatively associated with excess returns. Froot and Stein (1991) and Mathur et al (1994) show that exchange rates influence excess returns due to the fact that acquirers in a country with an appreciating currency can acquire international assets more cheaply, thus generating positive excess returns. We compute the ratio of current foreign exchange rate to the historical rate.…”

An analysis of gains and losses to shareholders of foreign bidding companies engaged in cross-border acquisitions into the United Kingdom, 1986–1991

“…They found that these companies had an insignificant negative abnormal return of -0.15% during a two day event window. Mathur, Rangan, Chhachhi and Sundaram (1994) analysed the abnormal returns from cross-border acquisitions into the US by 77 overseas bidding companies from 10 countries.…”