Financing Constraints, Ownership Control, and Cross‐Border M&As: Evidence from Nine East Asian Economies

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: This study distinguishes between the effects of financial constraint determinants on cross-border mergers and acquisitions (M&As) and domestic M&As for all takeover bids announced in nine East Asian economies from 1998 to 2005. Research Findings/Insights: The results of logistic regressions verify that the extent of stock market and governance developments improves corporate financing conditions and subsequently encourages cross-border M&As in East Asia. The results also indicate that, except for ownership control variables, the firm-specific factors of financing constraints reduce the occurrence of cross-border M&As relative to domestic M&As. Although family-and state-controlled firms have better access to external financing, they are reluctant to risk diluting their management control and thus prefer domestic M&As to cross-border deals. Theoretical/Academic Implications: This study enhances the empirical studies of the relation between financing constraints and corporate investments based on the market imperfection hypothesis of corporate finance theories. In addition, this study also addresses the interaction between the market imperfection hypothesis and agency theory in explaining the effects of special ownership control on cross-border M&As relative to domestic deals. Furthermore, by examining the research questions across nine East Asian economies, this study provides an understanding of how such a relation applies to firms in countries where information asymmetry is high. Practitioner/Policy Implications: The findings indicate the importance of corporate governance and verify the effects of unique organizational structures on major corporate decisions. Specifically, family-controlled firms are often free of the financing constraints inherent in investment decisions. Thus, it is necessary to consider such organizational uniqueness when explaining the financing behavior of cross-border M&As conducted by Asian firms.

Determinants of Cross-Border Mergers and Acquisitions: A Comprehensive Review and Future Direction

“…For example, Japanese outward M&A purchases have declined in 1990s and outward investments by Asian countries reported declining trend due to 1997 currency crisis (Kang & Johansson, 2000). While supporting this line, Chen et al (2009) suggested that firm investment decisions not only influenced by internal funds (e.g., deep pockets, arranging funds from subsidiaries), but also affected by outside investors who participate in capital markets. Hence, these external markets become imperfect and then not accessible (or, accessible at high transaction costs) for firm managers due to major uncertainties in macroeconomic policies such as legal codes, contract enforcement and information disclosure systems, which in turn affect the financial development and economic growth of the given country (Beck, Demirgüç-Kunt, & Levine, 2001;Forssbaeck & Oxelheim, 2011).…”

“…We also noticed growing research interest on CB-M&As in other emerging and Asian markets (Ang, 2008;Chen et al 2009;Fedderke & Romm, 2006;Pablo, 2009;Wang, 2013). In the early study, Vasconcellos et al (1990) investigated the determinants of CB-M&As involving US firms.…”

“…On the other hand, negotiation or transaction cost for cross-border deals is significantly higher than the cost for domestic deals due to international setting and border laws relating to taxation, legal fee and investor protection (Barkema & Schijven, 2008;Boeh, 2011;Chen, Huang, & Chen, 2009;Geppert, Dörrenbächer, Gammelgaard, & Taplin, 2013;Reddy, Nangia, & Agrawal, 2014a;Reddy, 2015cReddy, , 2015d. In particular, they "trigger additional taxation of the target's income in the form of non-resident dividend withholding taxes and acquirer-country corporate income taxation" (Huizinga, Voget, & Wagner, 2012).…”

“…They concluded that firm specific attributes play important role in explaining the overseas investments. By contrast, acquiring firms from East Asian region have found to be less participates in cross-border deals than domestic deals due to financing constraints (Chen et al, 2009). They suggested that firms that characterize sales growth and greater advertising intensity participate in overseas deals to capture market share and first-mover advantages.…”

“…Previous researchers suggested that deal structure not only depends upon firm-specific factors, but also depends upon deal type and payment method (Epstein, 2005;Haleblian et al, 2009). For example, a great extent of overseas acquisitions characterizes cash payment than stock payment (Chen et al, 2009). A bidder choosing cash payment should have higher levels of cash flows or should have expertise in integrating resources from its subsidiary firms [besides, debt], which does not necessarily change the ownership control in combined firm.…”