Target firm risk-return changes due to CBMA in emerging markets_MFA submission

Target firm risk-return changes due to CBMA in emerging markets_MFA submission

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Unformatted text preview: 1 Target Firm Risk - Return Changes due to Cross-border Mergers and Acquisitions in Emerging Markets Abstract We examine the impact of cross-border mergers and acquisitions on a target firm’s risk and return based on a sample of partially acquired target firms in 18 emerging countries between 1990 and 2007. We find that cross-border acquisitions significantly reduce both the total and downside risk of the target firms and that this reduction is more significant in acquisitions undertaken by bidders from countries that have better protection of investor rights. We also show that this risk reduction improves the risk adjusted performance of these firms. Thus, we conclude that cross-border partial acquisitions benefit an emerging market investors’ risk-return trade off by reducing investment risk and increasing investment returns; policy makers in emerging markets may be well advised to open their markets for partial cross-border acquisitions. 2 I. Introduction Cross-border M&As, including those in emerging countries, have now become a major component of foreign direct investment in the global economy. 1 This paper is motivated by the fact that, even with this increased economic importance, little systemic evidence is available on whether cross country acquisitions in emerging markets create value for the acquired companies and their shareholders. In this paper, we provide evidence on the changes to risk and return characteristics of target firms in emerging markets subjected to these cross-border M&As. Since we require data on these targets in the post-acquisition period, by design, we only focus on partial acquisitions. Our motivation behind this work is threefold. We claim that changes to risk and return characteristics in a partial cross–border acquisition of an emerging market firm would allow us to directly evaluate the economic benefits arising from these acquisitions. This evidence would be useful not only to the shareholders of future target companies but also to the policy makers in these countries who often are found to be wary of foreign acquisitions. Second, investigating both returns and risk may allow us pinpoint the sources of the gains, if any. Third, separating the acquirers based on their home country characteristics will allow us to test the “protection of investor rights” hypothesis that has been the main interest of recent studies on cross-border acquisitions (e.g. Bris and Cabolis, 2008; Martynova and Renneboog, 2008; and Bris, Brisley and Cabolis, 2008). 1 According to the World Investment Report (2008) published by the United Nation, about 70 – 80% of the foreign direct investment is now represented by cross-border M&As. The total transaction value in 2007 increased to $1,637 billion U.S., which is 21% higher than the previous record in 2000. The proportion of the cross-border acquisitions in emerging markets have increased from almost 0% in the late 1980s to 15% at the end of 2006 (WIR, 2007). 3 Accordingly, we examine the following research questions. First, we examine the impact Accordingly, we examine the following research questions....
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Target firm risk-return changes due to CBMA in emerging markets_MFA submission

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