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Unformatted text preview: nd private ones) involving at least 5% of the ownership of a company, with a total of 607 thousands of transactions until November of 2008. Merger and acquisition deals usually take a long time to be completed. Thus, in order to capture the right incentives behind these transactions, we consider the announcement date as the date of a merger and acquisition. Lastly, all announced deals that have not been withdrawn are considered. Evidence from previous crises Although East Asian countries experienced a sharp reversal in net portfolio equity and debt flows during the 1997‐98 financial crises, they witnessed a significant increase in FDI inflows. Krugman (2000) and Aguiar and Gopinath (2005) provide evidence that this increase in FDI inflows was driven by an increase in foreign acquisitions.164 This finding is confirmed by the data shown in Figure 1, which plots the number of cross‐border merger and acquisition (M&A) deals during this period for East Asian countries. The 1997‐98 crises also affected other emerging market countries, namely countries in LAC and Eastern Europe. Cross‐border merger and acquisition activity for these two regions are also plotted in Figure 1. The graph shows a clear upward trend in the number of cross‐border M&A deals over this period. For example, LAC‐7 countries had on average around 40 deals per quarter before the crises, whereas during the second half of 1998, this number increased around 50% to 60 deals per quarter. A similar pattern is observed in Eastern European countries after the Russian crisis in the third quarter of 1998. These countries went from an average of 26 deals per quarter before the crisis, to 52 deals per quarter six month after the onset of the crisis. In line with the existing evidence, Figure 1 suggests that during a crisis affecting only emerging economies, foreign investors from developed countries still have access to financial resources. They are thus able to take advantage of cheaper investment opportunities in crisis‐affected countries. Consequently, there is a significant increase in foreign ownership of domestic firms in financially‐constrained countries. The current financial crisis In contrast with the Asian/Russian crises, the current financial meltdown was originated in the United States and has then spread to both developed and emerging countries. Consequently, severe liquidity constraints are affecting not only the owners of (financially‐constrained) firms in emerging markets but also the potential foreign buyers of these firms. In other words, cross‐ 164 The evidence is explained not only by the elimination of policies unfavorable to foreign ownership in East Asia but also by the perception of multinational firms that they can buy Asian companies at significantly lower prices. 130 border mergers and acquisitions in emerging economies should not increase as it has during previous crises. The data shown in Figure 2 confirms this hypothesis. If LAC‐7 countries are considered, the number of announced deals has fallen almost 60%, from around 105 deals per quarter in the second quarter of 2007 to only 44 in the last quarter of 2008. There is a similar decrease in the value of the cross‐border mergers and acquisitions. Foreign acquisitions amounted to about US$ 11.6 billions in the second quarter of 2007 and have declined to only US$4.6 billions in the last quarter of 2008. It should be noted that the decrease in M&A activity is not an issue only for Latin American countries. Similar patterns can be observed in other regions. For example, the number of cross‐border M&A deals has decreased 25% in East Asia and almost 70% in Eastern Europe between the second quarter of 2007 and the last quarter of 2008. Furthermore, the main argument discussed in this...
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