International acquisitions in the United States: Evidence from returns to foreign bidders.
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.
John-Wiley & Sons
Mathur, I., Rangan, N., Chhachhi, I., & Sundaram, S. (1994). International acquisitions in the United States: Evidence from returns to foreign bidders. Managerial and Decision Economics, 15, 107-118.
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