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Abstract

This paper studies the government reaction to large corporate merger attempts in the European Union during 1997-2006 using hand-collected data. It documents widespread economic nationalism in which the government reaction depends on the nationality of the acquiring company. The nationalism takes place both as resistance to foreign acquirers and as support for domestic ones. This nationalism has both direct and indirect economic impact. The paper shows that government intervention is very effective in preventing foreign bidders from completing the merger and in helping domestic bidders succeed. The paper also demonstrates that nationalistic government reactions deter, indirectly, foreign companies from bidding for other companies in a country in the future.
*Serdar Dinc is with Rutgers Business School and Isil Erel is with the Ohio State University, Fisher College of
Business. We would like to thank L. Iván Alfaro, Ji-Woong Chung, and John Sedunov for providing excellent
research assistance. We are grateful to Christopher Wendt for sharing his voting data. We also would like to thank
the referee, the associate editor, Kenneth Ahern, Campbell Harvey (the editor), Randall Morck, John Parsons,
Roberto Rigobon, Paola Sapienza, Antoinette Schoar, Rene Stulz, Michael Weisbach, Christopher Wendt and
seminar participants at 2012 American Finance Association Meetings, Brandeis University, Chicago Fed, Federal
Reserve Board of Governors, Georgetown University, MIT, Ohio State University, Philadelphia Fed, Rutgers
University, University of Houston for comments. The usual disclaimer applies.
Contact information: Serdar Dinc, Rutgers Business School, 1 Washington Park, Newark, NJ 07102; email:
serdar.dinc@rutgers.edu. Isil Erel, Department of Finance, Fisher College of Business, Ohio State University,
Columbus, OH 43210; email: erel@fisher.osu.edu.
Economic Nationalism in Mergers and Acquisitions
I. SERDAR DINC and ISIL EREL*
ABSTRACT
This paper studies government reactions to large corporate merger attempts in the European
Union during 1997 to 2006 using hand-collected data. We document widespread economic
nationalism in which the government prefers that target companies remain domestically owned
rather than foreign-owned. This preference is stronger in times and countries with strong far-
right parties and weak governments. Nationalist government reactions have both direct and
indirect economic impacts on mergers. In particular, these reactions not only affect the outcome
of the mergers that they target but also deter foreign companies from bidding for other
companies in that country in the future.
Keywords: Protectionism, Patriotism, National Champions, Too-Big-To-Be-Acquired,
Government Intervention, International Capital Flows.
2
“Come sta?”
1
Corporate mergers and acquisitions are an important part of a market economy.
Large firms often enter into a new market through acquisitions of local firms. If
there is excess capacity in a sector, weak firms often exit the economy, not
necessarily through bankruptcy, but by being acquired by another firm. When
such mergers take place between companies from different countries, national
economies become more integrated. Yet, the reaction of governments to merger
attempts often seems to be motivated by concerns other than competition. In
particular, government interventions often appear to depend on the nationality
of the acquiring company.
Nationalist interventions by domestic governments do not simply take
form of opposition to foreign acquirers. They also include support for domestic
acquirers to create domestic companies that are considered too big to be acquired
by foreigners. For instance, consider the following comment by former finance
minister Dominique Strauss-Cahn about the French government’s support for the
merger of two French oil companies, Elf and Total Fina:
"[The merger will create] a French oil group that is almost at the
level of the three world leaders and therefore really protected from
any takeover attempt by an Anglo Saxon or American
[company]."
2
The anecdotal evidence about nationalist behavior raises several empirical
questions. Do governments really resist the acquisition of domestic companies by
3
foreign companies? If so, are such reactions just political statements or do they
have real economic effects on mergers and acquisitions? For instance, does
economic nationalism impede capital flows and investment by deterring future
acquisition attempts by foreign firms, or do the government interventions affect
the premiums offered to target shareholders? Further, what are the economic,
political, and sociological factors behind nationalism in mergers? These are some
of the questions that this paper addresses.
Our study of economic nationalism uses hand-collected data on
government reactions to individual merger attempts in the 15 European Union
(EU) countries (as of 1996) from 1997 to 2006. We show that domestic
governments are more likely to support domestic acquirers and oppose foreign
ones even though the EU treaty does not leave them with jurisdiction to rule in
merger attempts on the basis of nationality. These results are robust to controlling
for target, acquirer, and bid characteristics, macroeconomic conditions, as well as
target industry, target country, and year fixed effects. We also demonstrate that
nationalism has not only a direct impact on the outcome of the merger for which it
is targeted, but also, and perhaps more importantly, an indirect deterrent effect on
future foreign bids for other firms in that country. In other words, nationalism
affects international investment and capital flows even if they are not the direct
targets of a particular nationalist intervention.
We further show that nationalist interventions are more frequent when
preferences for natives over foreigners in both the social and the economic
domains are stronger. We measure the importance of such preferences by the vote
4
share of extreme right parties, for which preferences for natives and against
foreigners are defining issues in Europe, and by survey evidence. We also find
that nationalist reactions are stronger under weaker governments, in countries
holding the rotational presidency of the EU, and against firms in countries for
which the people in the target country have little trust or affinity. Interestingly, we
do not find a significant effect for unemployment, GDP growth, or the ideology of
the Prime Minister in the target country.
The study of nationalism in economics has a long history, and we follow
an old tradition in using the term “economic nationalism” to refer to the
preference for natives over foreigners in economic activities.
3
Of this earlier
literature, the paper closest to our own might be Golay (1958), who studies the
impact of such preferences on the ownership of firms in post-colonial Southeast
Asia.
4
Much of this literature focuses on trade protectionism. Interestingly, EU
countries, on which we focus, have some of the most liberal policies in the world
with respect to the flow of goods and capital, at least among themselves.
Furthermore, our study focuses on some of the richest countries in the world,
unlike recent work on economic nationalism that focuses on less developed
countries.
5
While economic nationalism is unlikely to be restricted to Europe only,
6
we chose to focus on large merger attempts in the EU because the EU provides an
ideal setting for a study of this kind for several reasons. First, for large mergers
across national borders in the EU, the European Commission, not the national
governments, is the anti-trust authority. Hence, a nationalist policy by domestic
5
governments cannot be disguised as pro-competition policy. In fact, as we explain
later when we discuss the legal background, the member countries of the EU
rarely have de jure power to block any merger based on the acquirer’s nationality;
instead, they have to rely on their de facto power. Second, Europe-wide economic
integration is unlikely to be complete. Indeed there still seem to be many
opportunities for cross-border mergers, especially following the recent financial
crisis. A study of the impediments to this integration is therefore important. Third,
there have been a sufficient number of domestic and cross-border merger attempts
within the EU to allow for statistical analysis. Finally, a large body of anecdotal
evidence points to economic nationalism in the EU.
The recent crisis has only increased the importance of economic
nationalism. Many firms are distressed and likely to exit their industry. Given
widespread weaknesses in a given country, a potential acquirer may be more
likely to be found in other countries. Yet calls for political intervention in the
economy in general and for protectionism in particular have increased in the
popular press.
7
Considering the role of protectionism in deepening and spreading
the Great Depression around the world (Irwin (1998)), an analysis of economic
nationalism and its impact is timely.
8
Our paper is related to several recent studies that examine the role of
merger regulations in the European context. Aktas, de Bodt, and Roll (2004),
Carletti, Hartmann, and Ongena (2012), and Duso, Neven, and Roller (2007)
study the stock market response to regulatory decisions or legislative actions
using event study methodology. Our focus and methodology, however, are
6
different. Guiso, Sapienza, and Zingales (2009) and Bottazzi, Da Rin, and
Hellmann (2008) demonstrate the importance of trust in cross-border financial
investments by using macroeconomic and venture capital investment data,
respectively. Ahern, Daminelli, and Fracassi (2012) also use macroeconomic data
and find that the volume of cross-border mergers is smaller when countries are
more culturally distant. In contrast, we focus on nationalism and use micro-level
mergers and acquisitions data as well as hand-collected data on actual government
reactions.
9
Finally, Morse and Shive (2010) find that country-level patriotism is
significantly related to the home bias in equity investments, and Gupta and Yu
(2009) show that bilateral capital flows reflect bilateral political relations. Unlike
these studies, our study is at the micro level.
This paper is structured as follows. Section I summarizes the institutional
background. Section II describes our data and sample. In Section III, we present
our main findings on economic nationalism in government reactions to merger
attempts. Section IV studies the sociological and political factors behind
nationalism. Section V examines the direct impact of nationalism on merger
outcomes. In Section VI, we study the indirect impact of nationalism, namely,
whether it deters future foreign acquisition attempts in that country. Section VII
concludes.
I. Institutional Background
Mergers above a certain size threshold with a sufficiently large
representation across the EU are deemed to have a European Community
7
Dimension,” in which case the relevant competition authority for these mergers is
the EU. Exceptions as discussed below notwithstanding, member countries have
to implement the ruling made by the European Commission on a merger case.
Any appeal can be made only at the European Court. This section first reviews the
regulation in the EU, and then discusses how the governments of member
countries implement nationalist policies within this legal framework.
A. Regulation in the European Union
For most of our sample period, the EU’s approach to mergers and
acquisitions was determined by the EU Merger Regulation of 1989, as amended
in 1997.
10
The European Commission, as opposed to the individual countries, had
the authority to rule on mergers if the mergers were deemed to have a community
dimension, which is defined as follows:
The aggregate worldwide turnover of all the merging parties is more than
5 billion Euros.
11
The aggregate community-wide turnover of each of at least two merging
parties is more than 250 million Euros.
12
The main exception to these size and breadth thresholds is that, if more than two-
thirds of the turnovers of each merging party take place in one and the same
member state, the competition authority is the government of that member
country. The implication of this community dimension rule is that mergers
between large companies from different countries within the EU typically fall
within the jurisdiction of the European Commission, while mergers between large
companies from the same country may satisfy the exception to the community
8
dimension rule. This distinction will prove to be important in allowing the
creation of national champions as discussed below.
13
If a merger satisfies the community dimension, a member state can still
take appropriate measures to protect the following legitimate interests:
14
public
security, plurality of media, prudential rules for financial companies, and other
public interests that are recognized by the European Commission. In other words,
nationalism in defense and media companies is explicitly allowed, so mergers
involving those companies are excluded from this study. However, beyond these
two industries, the EU’s Merger Regulation leaves little de jure power to
individual countries to implement their economic nationalism. So we now turn to
their de facto power in implementing such policies.
B. Common Methods of Implementing Nationalism in M&As
We define a company’s nationality as its —or its ultimate parent’s—
country of registration, which we discuss in more detail in the data section. Below
we review common methods used by individual countries in implementing
nationalist policies in mergers in our sample. Multiple methods are typically used
simultaneously.
B.1. Prudential Rules for Financial Companies
The EC’s Merger Regulation allows domestic governments to oppose an
acquisition of a financial company based on prudential rules even if the
community dimension is satisfied. This exception allows governments to
implement nationalist policies under the rubric of prudential rules. This ability,
however, has been relatively restricted since the Champalimaud case in 1999, in
9
which the European Commission took Portugal to the European Court because the
Portuguese government vetoed the acquisition of a Portuguese bank by a Spanish
bank based on the nationality of the acquirer (Gerard (2008)). The prudential rules
exception often serves as a way for the government to gain time while searching
for a white knight for the domestic target instead of vetoing an acquisition
outright.
B.2. Public Interest
The EU Merger Regulation also allows domestic governments to oppose a
merger in order to protect public interests, which are left undefined in the Merger
Regulation. Although this might seem to be a catch-all clause that can be invoked
at will by individual governments to block a merger, its use is actually limited in
practice because any public interest must first be recognized as such by the
European Commission.
B.3. Moral Persuasion
Moral persuasion is especially common when governments try to stop a
merger at the rumor stage by stating that they are against it. Although they may
have no de jure power to stop a merger, the implicit threat is that the acquiring
company will be dealing with a hostile domestic government on many regulatory
issues if the acquisition goes through. This implicit threat is more powerful if the
government is also a major customer, as the case may be for a pharmaceutical
company.
B.4. Golden Shares in Privatized Companies
In many privatized companies, domestic governments still hold golden
10
shares,” or the right to veto major corporate changes, such as the decision to be
acquired. This can be a major deterrent to foreign acquirers even though such
rights are increasingly in a legal grey area because they are frequently rejected in
the European Court when challenged (Adolff (2002)).
B.5. Playing For Time
Apart from the prudential rules for financial companies as mentioned
above, requirements for the stock market regulator to approve any tender offer
and/or approvals necessary from various commissions (such as energy boards) to
clear potential mergers are often used by the domestic government. In this way,
governments gain time to find and/or fund a friendly bidder for the target.
However, politicians’ control over such regulators varies across countries and
time.
B.6. Providing Financing to Domestic Bidders
Domestic governments often support domestic bidders by providing
financing to complete the acquisition. Direct aid from the government budget,
however, is rarely used. Instead, public pension funds and government-owned
banks lend to the acquirer or invest in the merged company. There are typically
fewer restrictions on these financial institutions investment choices than the
restrictions placed on individual governments by the EC Merger Regulation.
Given the limited effectiveness and questionable legality of other methods, this
method may be observed even more frequently in the future, especially if
governments start creating sovereign wealth funds that can be used to prevent the
acquisition of domestic companies by foreign companies, as advocated by former
11
French president Nicolas Sarkozy (Hall (2008)).
B.7. Finding White Knights
This is one of the most effective methods to block an unwanted acquirer.
While using other methods to gain time, the government and/or target
management try to find a friendly acquirer (white knight) or a friendly blocking
minority holder (white squire). Advantageous financing through government-
controlled financial institutions often follows as discussed above.
B.8. Creating National Champions
This involves supporting the merger of two domestic companies in the
hope of creating a new company that is too big to be taken over by foreign firms.
Target size is often a good deterrent of foreign acquisitions and this pre-emptive
move is very common.
II. Data and Sample Description
Our sample contains the largest 25 merger targets by market capitalization
of target firms in each of the first 15 EU countries (as of 1996) from 1997 to
2006. These countries are Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden,
and the U.K. All firms in our sample are publicly listed. We define the nationality
of a company as its country of registration or, if it is majority-owned, as its
parent’s country of registration.
We use Thomson Financial’s SDC Mergers and Acquisitions database for
non-U.S. targets to identify merger attempts and their characteristics. We include
12
a merger bid in our sample if the acquiring firm aims, with the proposed
acquisition, to become the majority owner or to cross the 20% ownership
threshold to become the largest shareholder. If there are multiple bidders for the
same target firm, we keep all of them. For Luxembourg, there are only 10 merger
attempts during this time period. All other countries have 25 observations or more
due to multiple bids, forming a sample size of 415 merger bids for 15 countries.
Spain has the largest number of observations at 35. These merger bids are made
by firms in the same country as the target firm as well as by foreign firms from all
around the world. Our sample comprises 197 domestic bids and 218 foreign bids.
Facing an acquisition bid, the target firm’s government has three choices:
support the bid, oppose the bid, or be neutral/do nothing. To identify government
reactions to the merger bids, we search newspaper articles about each merger
attempt using Factiva. We use a large set of key words to identify articles likely to
be relevant and read all of them.
15
Based on these newspaper articles, especially
using quotes from government representatives, we identify a governments
reaction to a merger bid as support, opposition, or neutral/no reaction. We use
only quotes by Prime Ministers and cabinet ministers and their
spokespersons as well as actions taken by them. For targets in banking, we also
include central banks, which typically examine any bank merger. No other
government agency or politicians, including those that belong to the governing
party, are used to classify the data. Any possible disagreements among cabinet
ministers do not appear to be made public. If the domestic government has the
anticompetition jurisdiction on a domestic merger and the cabinet follows the
13
recommendation of the agency in charge of the anticompetition examination, the
government action is not considered an intervention for our purposes. The manual
search for government actions was, by far, the most time-consuming aspect of our
study.
There are both advantages and disadvantages to our approach. The main
disadvantage is that we underestimate economic nationalism in mergers and
acquisitions by looking at the government reaction to actual or rumored bids. For
example, if a country’s government is known to oppose foreign acquirers,
potential foreign acquirers will fail to materialize in the first place and the
government will not need to oppose openly any foreign bids. In this case we will
not capture a nationalist reaction by that country’s government, and thus our
method is likely to underestimate nationalism in cross-sectional analysis.
16
The
main advantage of our approach is that it focuses on direct government reactions
rather than surveys of nationalist sentiment or the ideology of the ruling party,
which may or may not be correlated with actual actions. This method also allows
us to exploit the timing of government reactions and study its subsequent
deterrent effect on future merger attempts.
Simple frequency counts of government reaction provide initial evidence
that whether the bidder is foreign or domestic is an important factor behind
government reactions. Governments are more likely to support a domestic
acquisition and oppose a foreign acquisition of a domestic company. Figure 1
illustrates this difference visually and Table I provides a more detailed tabulation.
Although Table I indicates that governments stay neutral, or do not show any
14
reaction, to the majority of bids, the Pearson chi-squared test provides evidence
against the equality of distributions for government reactions by the nationality of
the acquiring company at a significance level better than 1%.
[Figure 1.BMP about here]
Table I also shows that there are large differences across countries in the
degree of interventionism. France, Italy, and Spain, followed by Portugal, have
the most interventions on merger attempts in our sample, where Greece and the
U.K. have no interventions in our sample. In Section IV, we study the
sociological and political factors behind nationalism.
[Table I about here]
We obtain firm-level data such as market capitalization and net income for
target firms from Datastream and Global Compustat. Table II, Panel A reports
summary statistics on target firms and the merger bids that they receive from
domestic and foreign acquirers. Based on a comparison of sample statistics there
is no statistically significant difference across targets based on whether the
acquirer is foreign or domestic.
Table II, Panel B tabulates similar characteristics by the reaction of the
target country’s government. We see more differences based on government
reaction. Compared to the median merger bid that gets a neutral or no reaction
from the government (1.4 billion Euros), the median bid that the government
opposes or supports is larger (6.3 billion and 6.6 billion Euros for opposition and
support, respectively). Governments also tend to oppose hostile or unsolicited
bids much more frequently. Most importantly for our analysis, 75.7% of all
15
merger attempts that are resisted by the government are initiated by foreign
acquirers while only 17.1% of the bids supported by the government are foreign
bids. This difference is statistically significant at the 1% level.
For robustness checks in multivariate analysis, we also employ country-
level controls. GDP growth and the unemployment rate, which is reported as the
percentage of the labor force, come from the IMF database. The political
affiliation of the ruling party comes from rulers.org, and the election dates come
from electionguide.org and other internet sources.
[Table II about here]
III. Multivariate Analysis of Economic Nationalism in M&As
A. Specification
To study the government reactions to merger bids, we employ a discrete-
choice model that estimates the likelihood of a particular government reaction to a
given merger bid. When the target firm receives a merger bid, the government has
three choices: oppose, support, or do nothing/stay neutral. Given the number of
choices, a multinomial logit model allows us to estimate the effect of bid-, firm-,
and macro-level factors on the government’s reaction to the merger bid (see
McFadden (2001) and Train (2003) for an overview). A different set of
coefficients is estimated for different outcomes within the same regression. These
estimates are relative to the base outcome, which is taken to be doing nothing or
staying neutral, as this outcome is the observed reaction in the majority of cases.
16
We provide average marginal effects with heteroskedasticity-robust standard
errors corrected for clustering at the target country level.
B. Results
Table III provides estimates of our main multinomial logit model. The
estimates are for two possible outcomes, namely, government opposition and
government support, and are relative to the base case of no reaction/staying
neutral. The first model serves as a benchmark and includes characteristics at the
bid and target firm levels but excludes the Foreign Acquirer Dummy, our main
variable of interest.
[Table III about here]
The benchmark regression shows a statistically significant size effect: a
10% increase in target size increases the probability of opposition by 0.19
percentage points and that of support by 0.32 percentage points on average,
compared to a 10% unconditional probability for either outcome. This effect is
significant at the 1% level for both outcomes. European governments are also
more likely to oppose a bid by 8.3 percentage points on average if it is hostile or
unsolicited.
The second regression adds Foreign Acquirer Dummy, our main variable
of interest, to the explanatory variables. This variable has a large average
marginal effect that is significant at the 1% level for both types of intervention.
European governments are 15.1 percentage points more likely to oppose and 13.6
percentage points less likely to support a foreign acquirer, on average. This is a
very strong preference for domestic owners and against foreign owners given that
17
the unconditional probability is about 10% for both outcomes and only about half
of the sample acquirers are foreign companies.
As mentioned in the introduction, we follow an old tradition in economics
and use the term nationalism to denote the preference for natives against
foreigners. A natural question to ask is whether the nationalism we find above is
stronger when such nationalist sentiment is strong. However, it is not trivial to
measure such sentiment or to find a proxy for it. We consult the recent political
science literature that studies the rise of extreme-right parties in Europe in the
1990s and thereafter. Three main findings of this literature are important for our
analysis.
17
First, a common theme of these European parties is their advocacy and
preferences for natives over foreigners and immigrants. For example, Mudde
(1996) finds that, among the 26 different academic studies surveyed, the
following five features are mentioned by at least half of the studies: nationalism,
racism, xenophobia, antidemocracy, and strong state.
Second, despite the free market origins of some of these extreme right
parties, by the 1990s most of them adopted economic policies that are
protectionist and economic nationalist, and against globalization (see, for
example, Betz and Swank (2003), Mudde (2007, pp. 119-137, 184-197), Zaslove
(2008), and Hainsworth (2008, pp. 85-89)).
Third, although extreme right parties rarely came to power on their own,
their impact on European politics has been large as they have forced other parties
18
to move to the right and they have dominated the discussion on foreigners (see,
for example, Bale (2003), Schain (2006), Hainsworth (2008, pp. 111-121)).
Following the findings of this literature, we use the vote share of extreme
right parties as identified by Golder (2003) and updated by Wendt (2009) as a
proxy for the strength of nationalist sentiment.
18
We test for whether the impact of
foreign ownership of the acquirer on the government decision increases as the
vote share of extreme right parties also increases. We are not aware of any other
empirical study that uses this proxy but we are certainly not the first in economics
to link extreme right ideology to economic nationalism; see, for example, Knight
(1935).
This test is essentially a test for the interaction effect between the Foreign
Acquirer Dummy and Far Right Vote Share. In a usual linear estimation, this
would be straightforward the coefficient on the interaction term would
immediately give the interaction effect. However, in a nonlinear estimation such
as the multinomial logit model here, Ai and Norton (2003) show that the
calculation of the interaction effect is more complicated, and that it typically
depends also on coefficients other than that on the interaction term as well as on
the values that the independent variables take. In Appendix A we provide details
on how the average marginal effects are derived and calculated for the interaction
effects in the multinomial logit estimation.
The third regression reported in Table III is the same as the second
regression except that Far Right Vote Share and its interaction with Foreign
Acquirer Dummy are included. Country fixed effects, on the other hand, are
19
omitted as the vote share of extreme right parties changes only in election years.
The results show that European governments are more likely to intervene, both in
support or opposition of a merger, where and when the extreme right parties are
strong; this effect is statistically significant at the 5% level. The average marginal
effect of foreign acquirer is somewhat smaller than, though still comparable to,
the values reported above and significant at the same 1% level.
Our main interest, the interaction effect, is also economically significant.
A one percentage point increase in the extreme right vote share increases the
probability that the domestic government opposes a foreign acquirer by 0.6
percentage points, on average; this effect is significant at the 10% level. To put
this effect in perspective, the vote share of extreme right parties is in low single
digits where and when they are weak but increases to low double digits when they
are strong. Hence, a 10 percentage point increase in the vote share increases the
probability of opposition to a foreign acquirer by 6 percentage points, which is
more than half the unconditional probability. Similarly, a 10 percentage point
increase in the extreme right vote share decreases the probability of support for a
foreign acquirer by 8 percentage points, which is close to the unconditional
probability. This effect is significant at the 1% level.
To summarize, the nationalist preference of governments for domestic
owners over foreign owners is stronger when the nationalist sentiment of voters is
also strong. The next subsection provides robustness tests of our main result and
this interaction effect.
C. Robustness
20
C.1. Macroeconomics
Macroeconomic factors may also affect government decisions. In
particular, the effect of the extreme right vote share documented above may
simply be a reflection of macroeconomic factors, especially unemployment, rather
than the role of nationalist sentiment in that country.
19
In Table IV, Panel A, we
repeat the third regression in Table III by substituting the extreme right vote share
first with the GDP growth rate, and then with the unemployment rate. Neither of
these terms has a statistically significant effect either alone or interacted with the
foreign acquirer dummy. Hence, the extreme right vote share is not capturing any
effect of macroeconomic factors, especially of unemployment. Furthermore, the
foreign ownership of the acquirer continues to have an economically and
statistically significant effect.
C.2. Acquirer and Bid Characteristics
We check the robustness of our results to controlling for acquirer size and
profitability, using, respectively, the natural logarithm of the acquirer’s market
capitalization and its net income over market capitalization. These data come
from Datastream as of the most recent fiscal year-end before the bid is announced.
Unfortunately, we only have data on acquirer size for 255 bids, or about two-
thirds of the sample. The results are reported in the first regression of Table IV,
Panel B. Neither acquirer size nor profitability has a statistically significant effect,
but the foreign ownership of the acquirer continues to have a statistically and
economically significant effect.
[Table IV about here]
21
We check the robustness of our results to whether the bid consists only of
cash or includes the stock of the acquiring company (second regression of Table
IV, Panel B). We have data for only 342 bids for this robustness check. We find
that governments are more likely to support a bid that includes the acquiring
company’s stock. Our main variable of interest, the foreign ownership of the
acquirer, remains statistically and economically significant.
C.3. Other robustness checks
We also perform additional robustness checks and present them in detail
in the Internet Appendix (IA).
20
Our mergers and acquisitions data include some
merger rumors but the selection of rumors, unlike formal merger bids, may
incorporate subjective criteria by the data provider, and in particular, may change
across countries and over time. Hence, we repeat our main regression after
excluding rumors from the sample. This amounts to excluding 23 data points, or
about 5% of the full sample from the analysis. We find that the economic
nationalism found above remains robust to the exclusion of these acquisition
rumors.
In some companies, the domestic government owns golden shares, the
right to veto a major decision, including mergers. We search Factiva to identify
the target companies in which the domestic government has golden shares and
exclude the bids to those target companies, about 5% of our sample, from our
analysis. Our results are robust to the exclusion of those targets.
22
IV. Factors Behind Economic Nationalism in Mergers and Acquisitions
In this section, we study the factors that strengthen or mitigate nationalist
reactions in mergers and acquisitions. We study both sociological and political
factors. While the former change only slowly, the latter tend to vary from one
electoral cycle to the next. We find that both types of factors play a role in
government reactions.
A. Sociological Factors
As another measure of the attitude of people in target countries toward
foreigners, we use the answers to a question in Eurobarometer survey #47
administered in the EU in 1997 about the foreigners living in the respondent’s
country. The question asks the respondent to choose the statement with which
they agree. We use the proportion of respondents who agreed with the statement
“there are too many foreigners [in my country]” as a measure of the target
country’s attitude towards foreigners.
21
The first regression in Table V, Panel A
provides the results. We find that governments are more likely to oppose a foreign
acquirer in target countries where more people think there are too many
foreigners.
Guiso, Sapienza, and Zingales (2009) and Bottazzi, Da Rin, and Hellmann
(2008) find that trust is an important factor behind international investment, so we
also check whether government reactions are different if people in the target
country trust people in the acquirer’s country to a greater extent. In regression 2
of Table V we include a measure of the trust that target country citizens feel for
others, including people in their own country, as well as the interaction between
23
this variable and Foreign Acquirer Dummy.
22
We find that trust plays a role in
government reactions to mergers and acquisitions. Government opposition is
weaker if the foreign acquirer is from a country for which the people in the target
country have a higher level of trust. Similarly, government support for acquirers
from those countries is more likely.
[Table V about here]
Following Bottazzi, Da Rin, and Hellmann (2008), we also use the points
given by the target country in the Eurovision song contest as an alternative
measure of the target country’s affinity for the acquirer’s country. We construct a
time series of Eurovision votes covering our sample period for the merger bids
where both the target and the acquirer are from Europe. The variable Ln
(1+Lagged Eurovision Votes) is the natural logarithm of the votes that the
acquiring firm’s country received from the target country in the Eurovision song
contest in the previous year.
23
We report these results in Table V, Panel A. We
find that government opposition is weaker if people in the target country have
greater affinity for the acquirer’s country. We also check whether sharing a
common border, language, or religion play a role. In Table V, Panel B we do not
find any evidence that these factors affect government reactions to mergers and
acquisitions.
B. Political Factors
We study the role of both domestic and EU politics. The results are
reported in Table VI. We start with the ideology of the Prime Minister’s party in
the target country on the announcement date. We use the ideological classification
24
by Volkens et al. (2010) using party programs. The variable Right Leaningness
(the “rile” measure in their dataset) is a continuous measure where higher levels
indicate more rightist positions. Leftist parties tend to have negative levels of this
measure. An overwhelming majority of ruling parties has a center-right or center
left-ideology. We interact Right Leaningness with the Foreign Acquirer Dummy.
The interaction terms do not have significant coefficients.
24
Interest groups may be able to influence weak governments more easily,
so we also study whether weak governments are more likely to have nationalist
reactions. Coalition governments tend to include smaller parties and may be more
easily captured by interest group politics. We interact the Foreign Acquirer
Dummy with the binary variable Coalition Government, which takes the value of
one if the target country is ruled by a coalition government on the announcement
date. We find that the coefficient on the interaction term has the same sign as the
Foreign Acquirer Dummy and is statistically significant for government support.
This result indicates that coalition governments, which tend to be weaker than
single-party governments, are more likely to take nationalist actions.
[Table VI about here]
We further check this result by interacting the Foreign Acquirer Dummy
with Government Vote Share, which is the total vote share obtained by parties
forming the government in the most recent election before the announcement date
in the target country. We find that the coefficient on the interaction term has the
opposite sign as the Foreign Acquirer Dummy and is statistically significant for
government support. This confirms that strong governments are less likely to act
25
nationalistically. This result is similar to that in Dinc and Gupta (2011), who find
that governments are more likely to undertake privatizations where they are
stronger. These results also indicate that nationalist interventions are unlikely to
be taken by governments following an industrial policy with a long horizon.
We also study the role of EU politics. Every EU country assumes the EU
presidency for six months on a rotating schedule. Target countries may act less
nationalist during their presidency as they lead the EU, or the power of presidency
may induce them to become bolder during that time. To test which effect
dominates, we interact the Foreign Acquirer Dummy with EU Rotational
Presidency, which takes the value of one if the target country has the rotational
presidency on the announcement date. We find that the coefficient on the
interaction term has the same sign as the Foreign Acquirer Dummy and is
statistically significant for government opposition. This suggests that target
countries act more nationalist when they hold the rotational EU presidency.
We also study whether the nationality of the European Commission
President matters. The European Commission is the executive branch of the EU
and its president is regarded as the most powerful EU official. The President of
the European Commission is nominated by the European Council, which contains
the head of government of every EU member, and is approved by the European
Parliament for five-year terms. As with the EU presidency, target countries may
act more or less nationalistically if the European Commission President is from
their country. To test for this effect, we interact the Foreign Acquirer Dummy
with EU Commission Presidency, which takes the value of one if the European
26
Commission President is from the target country on the announcement date. We
find that the coefficient on the interaction term has the opposite sign as the
Foreign Acquirer Dummy and the coefficient on the government opposition is
statistically significant. This suggests that target countries become more reluctant
to act nationalistically when one of their nationals holds the presidency of the
European Commission. In an earlier version, we also studied the role of elections
following Brown and Dinc (2005) and Dinc (2005) but did not find any
statistically significant effect.
V. Direct Impact of Nationalism
The next important question to address is whether nationalism has any
economic impact. After all, government opposition or support may simply be a
manifestation of political posturing with little real economic influence. In this
section, we study the direct impact of government intervention. More precisely,
we examine whether a merger bid is more (less) likely to succeed when the
government supports (opposes) it. We then analyze the effect of government
opposition on the premiums offered or received, taking the endogeneity of the
merger premium into account.
A. Direct Impact of Nationalism on Merger Outcome
We first perform a univariate comparison of the success/failure of the
merger attempts that receive different government reactions. Table VII shows that
out of 37 merger bids that the government resists, 26 (70%) eventually fail. Out of
41 merger bids that the government supports, only 11 (27%) fail. The difference
27
of distributions is significant at the 1% level as indicated by Pearson’s chi-squared
test. This univariate analysis suggests that government interventions have a direct
economic impact. Of course, government interventions may simply be a proxy for
foreign acquirers. If cross-border merger attempts, once announced, are inherently
more difficult to complete, then these univariate statistics may just reflect that
difficulty. We therefore turn to the regression analysis next.
[Table VII about here]
We employ a binary choice framework a logistic regression where
the dependent variable is equal to one if the merger takes place and zero if the
merger fails. Table VIII reports the results. The first model is the base model with
the Foreign Acquirer Dummy as well as controls at the bid and firm levels. The
model also includes the target industry and target country fixed effects. The
regression analysis indicates that acquisition attempts that target larger
companies, that attract multiple bids, and that are hostile are less likely to be
successful. The coefficient on the Foreign Acquirer Dummy is negative but not
statistically significant. This suggests that bidders seem to internalize possible
difficulties in completing a cross-border merger when they attempt the merger.
[Table VIII about here]
The second regression adds Government Opposition and Government
Support, two dummy variables that identify government reactions. (Recall that the
government does not react, or stays neutral, in the majority of merger attempts, so
both of these dummy variables are zero for the majority of observations.) The
coefficient on Government Opposition is negative and significant at the 10% level
28
while the coefficient on the Government Support is positive and significant at the
5% level. Notice that the Foreign Acquirer dummy is also included in this
regression so government intervention cannot simply be a proxy for possible
inherent difficulties in completing a cross-border merger.
If the European Commission believes the target government’s reaction
impedes the free flow of capital, it may intervene in the merger case. The typical
intervention is typically worded as a reminder of EU rules, but it carries the
implicit threat of taking the target government to the European Court as it did in
the Champalimaud case mentioned earlier. We have 18 such cases. We control for
these cases using the European Commission Intervention Dummy in the third
regression. This variable takes a positive and statistically significant coefficient,
which indicates that merger bids are more likely to be successful after the
European Commission intervenes. The effects of our main variables of interest,
Government Opposition and Government Support, remain robust after controlling
for such interventions.
In the final regression model, we control for the size of the acquirer, using
the natural logarithm of its market capitalization as of the most recent fiscal year-
end before the bid is announced. Acquirer size does not have a statistically
significant coefficient but both Government Opposition and Government Support
continue to have a statistically and economically significant effect.
The above results show that, relative to government neutrality,
government intervention has a direct impact on the outcome of corporate
acquisition attempts. In other words, a merger bid is more likely to succeed if the
29
government supports it while it is more likely to fail if the government resists it.
Therefore, the economic nationalism demonstrated above is not just political
posturing, but rather it has a direct impact on the workings of the market
economy. In section VI below, we also demonstrate its indirect impact on the
acquisition of other, uninvolved, companies.
B. Direct Impact of Nationalism on Premium Offered
Next we examine whether government opposition or support affects
merger premiums offered. A simple comparison of premium statistics by
government reaction or merger success is tabulated in Table IX. The variable
Premium Offered is calculated as the last price offered by the bidder minus the
target’s stock price as of four weeks prior to the announcement date, normalized
by the latter and expressed in percentage. We winsorize Premium Offered at the
5% and 95% levels to eliminate the effect of outliers in the sample. For successful
bids, the last price offered is the transaction price; for unsuccessful bids, it is the
last price offered before the bid was withdrawn.
Both the mean and the median premium offered are higher for the opposed
bids than for the supported ones (43.60 versus 33.02 and 30.71 versus 24.26,
respectively). However, the differences are not statistically different from zero.
Both the mean and the median premium offered are larger for the failed bids than
for the successful ones, but the differences are again statistically insignificant.
[Table IX about here]
Next, we analyze the effect of government reactions on bid premiums.
However, this task requires care. A government may decide its interventions
30
based on initial bids, in which case the government intervention variables and the
offered premiums are endogenous. We need an instrument that affects
government interventions but not (directly) the premium offered. In the previous
section, we show that political factors, such as government vote share, European
Commission presidency, or whether the government is a coalition, can help
determine government interventions. We believe that such political factors can be
valid instruments. It is difficult to see why an acquirer’s premium would reflect
the government vote share, for example, other than through the government’s
intervention decision.
25
We focus on the political variables that have a direct effect on the
government intervention decision in Table VI. Unlike in Table VI, we do not
focus on the interaction of these variables with the foreign acquirer indicator
because the foreign acquirer indicator is likely to violate the exclusivity
requirement of these instruments. From Table VI, we know that Coalition Dummy
significantly explains government opposition, while Government Vote Share, EC
Presidency Dummy, and again Coalition Dummy significantly explain
government support. Therefore, we use Coalition dummy as an instrument for
government opposition while we use Government Vote Share and EC Presidency
Dummy as instruments for government support for the merger bids.
We are unaware of instrumental variables estimation methods that allow a
multinomial choice model in the first stage without making any distributional
assumptions in the second stage. Hence, we choose to model the first-stage
government intervention with two equations, one whose dependent variable is the
31
government opposition indicator, and the other whose dependent variable is the
government support indicator. Notice that the government opposition and support
variables that are instrumented are binary variables. One can approach this
estimation by using 2SLS directly, which would ignore the binary nature of the
instrumented variables, or by solving a two-stage maximum likelihood function,
which would critically hinge on the validity of functional form assumptions.
Instead, we follow Wooldridge (2007, p.4), who suggests performing this
instrumental variables estimation by estimating the first-stage using probit
obtaining predicted probabilities from this regression, and using these predicted
probabilities as instruments in the 2SLS estimation. We therefore start by
estimating two probit regressions where the dependent variables are the
government opposition indicator and the government support indicator.
Results are reported in Table X. The first two columns in each Panel
report estimates from the first-stage probit models. The F-statistic for the
significance of our instruments is greater than 10 in each case, which suggests that
our instruments are not weak. The third column in each panel reports the second-
stage regression results. In the first panel the dependent variable is Premium
Offered while in the second panel it is Premium Received, which equals Premium
Offered multiplied by the Successful-Bid Dummy. Notice that the sample is larger
in the second panel because many failed bids with missing premium data can be
set to zero in the second panel. We winsorize our premium measures at the lower
and upper 5% levels to eliminate the effect of outliers. As shown in Table X,
neither government opposition nor support, both instrumented, is statistically
32
different from zero in explaining the premium offered or premium received in
mergers.
26
,
27
[Table X about here]
VI. Indirect Impact of Nationalism: Deterrence of Future Foreign
Acquisition Attempts
We have shown that nationalism has a direct impact on the outcome of an
acquisition attempt if the domestic government opposes or supports that attempt.
We now study the indirect effect of nationalism on future acquisition attempts by
foreign companies. More specifically, we study whether nationalism deters
foreign acquisition attempts for other companies in that country as potential
bidders may infer from a nationalist intervention the domestic government’s
willingness to intervene and oppose the European Commission. Any such
deterrent effect of nationalism would add to its direct effect in impeding the
workings of the market economy in general and international capital flows in
particular.
We identify the top 50 listed companies in each country as of the end of
1996 and follow them through December 31, 2006 or until they became the target
of an acquisition bid.
28
We examine whether these firms become less likely to
receive a foreign bid after a nationalist reaction by their government.
29
Our main
analysis in previous sections requires foreign bids to be made and hence cannot
capture the effect of nationalism on bids that are never made due to the
nationalism threat. This problem is less severe here because the analysis in this
33
section requires only one nationalist reaction in a given country and the
overwhelming majority of countries in our sample have at least one such reaction.
Before we provide a hazard analysis of foreign acquisition attempts in this
sample, we start by studying the rate of foreign bids per 1,000 firm-years, the
incidence rate, before and after the most recent nationalist intervention in that
country. Following the results presented above, we refer to both opposition to
foreign acquirers and support for domestic acquirers by the domestic government
as nationalist intervention. Figure 2 depicts the incidence rate semiannually for
three years after the most recent nationalist intervention in countries with at least
one nationalist intervention in our sample. It also shows the incidence rate for the
base period, which is defined as the time before nationalist intervention or more
than three years after the most recent nationalist intervention.
[Figure 2.BMP about here]
The incidence rate drops during the first six months after a nationalist
intervention, continues to decrease until it reaches its low point between 13 and
18 months, and then slowly recovers. The fact that the drop is not sudden may
reflect the fact that many friendly merger negotiations take place before they
become public and the companies involved in such talks at the time of nationalist
intervention may choose to continue with their merger. This pattern is confirmed
in a hazard analysis below.
We employ a Cox proportional hazard framework to study the rate of
foreign acquisition attempts before and after nationalist intervention. All the
regressions control for target firm size and macroeconomic factors in the target
34
country as well as target industry and target country fixed effects. All the standard
errors are robust to heteroskedasticity and clustering at the target country level.
It is also important to control for merger waves. Cox estimation non-
parametrically controls for time-specific common factors, which is akin to the
effect of including time fixed effects in other settings. In this way, we control not
only for merger waves but also for other Europe-wide time-specific common
economic and regulatory factors.
In studying the deterrence effect of nationalism, one needs to choose the
events on which to focus. One can focus on the effect of the most recent
nationalist intervention or on all such interventions within a time window. The
former has the advantage of focusing on the event that is likely to have the
strongest deterrence effect. The disadvantage of this choice is that it may be
difficult to capture longer-term effects of nationalism if a country intervenes
frequently. The latter choice of focusing on all the nationalist interventions within
a time window mitigates this disadvantage but has its own disadvantage of
studying the effects of interventions that have already been overshadowed by
more recent interventions. In this paper we use both approaches, starting with the
former, and obtain similar results.
We first construct six indicator variables, starting with 1st Half-Year and
ending with 6th Half-Year. The variable named 1st Half-Year takes the value of
one during the first six months after the most recent nationalist intervention.
Similarly, 2nd Half-Year takes the value of one during the second six months after
the most recent nationalist intervention, and so on. These variables are country
35
specific so when they take the value of one, they do so for all the firms in the
country where the nationalist intervention has taken place. Notice that when these
variables are constructed based only on the most recent nationalist intervention
only, at most only one of these indicator variables can be equal to one at a given
time. That is, if the government intervened both six and 12 months before, only 1st
Half-Year is one.
Table XI reports the regression results. The first regression, which serves
as a benchmark, does not include any nationalism-related variable and includes
only those countries with at least one nationalist intervention in our sample. The
second regression, which adds to the benchmark model the six semi-annual
dummy variables described above, confirms Figure 2. All six dummy variables
have negative coefficients and all the coefficients, except those on 1st Half-Year
and 6th Half-Year, are statistically significant. The results are economically very
significant. For example, at the low point of the third half-year after a nationalist
intervention, the rate of foreign acquisition attempts towards the firms in that
country drops to less than 5% (=exp(-3.129)) of the base rate!
[Table X about here]
The third regression repeats the second regression for the full sample,
without excluding the countries that have no nationalist reaction in our sample
period. The results are both economically and statistically similar.
Our semiannual past nationalism indicators in the regressions above are
constructed based on the most recent nationalism intervention only. As a
robustness check, we reconstruct these variables using all the nationalist
36
interventions in that country in the previous three years and repeat the regressions.
Notice that when these variables are constructed based on all the nationalist
interventions in the previous three years, more than one indicator may be equal to
one at a given time. The results reported in the last two columns of Table XI
indicate that our previous results are robust to this alternative construction.
Notice that our regressions include country fixed effects. Hence, if a
country intervenes very frequently, much of the deterrence effect of those
interactions are captured by the country fixed effects so our estimates for the post-
intervention indicators will likely be underestimated. Also recall that we stop
following a firm after it receives its first acquisition attempt, regardless of
subsequent government reaction to that acquisition attempt. So these post-
intervention indicator variables capture only the impact of nationalist reactions on
the rate at which other companies in that country receive a foreign acquisition
attempt. In light of the results presented above, the impact of nationalism on the
target companies that are subject to nationalist intervention would probably be
even greater.
[Table XI about here]
We also repeat the hazard analysis above at the country level. Starting
again with the same cohort of the largest 50 listed companies as of 1996, we
collapse the data at the country level and focus on the hazard rate of one of those
companies receiving a foreign acquisition bid. We follow each country until the
end of 2006, so the analysis is not based on only the first foreign bid in this period
37
but rather on all the foreign bids received by this cohort of firms. The country-
level results, reported in Table XII, confirm our firm-level results reported above.
These findings show that nationalism has not only a direct impact on the
acquisition attempt to which it is directed, but also an indirect impact by deterring
foreign companies from acquiring other companies in that country.
[Table XII about here]
VII. Conclusion
This paper provides evidence of economic nationalism in mergers and
acquisitions. We find that, instead of staying neutral, governments of countries
where the target firms are located tend to oppose foreign merger attempts while
supporting domestic ones that create so-called national champions, or companies
that are deemed to be too big to be acquired. We find that these government
reactions have both direct and indirect economic effects. Government opposition
decreases the completion chances of acquisition attempts while government
support increases them. Furthermore, nationalist reactions have an indirect impact
on corporate mergers by deterring future foreign acquirers. These findings
indicate that nationalist reactions by governments affect the workings of the
market economy significantly.
We also study the sociological and political factors behind nationalism.
We find that stronger nationalist sentiment, as proxied by the vote share of
extreme right-wing parties or answers to survey questions on foreigners living in
target countries, lead to more nationalist reactions by governments in mergers.
38
The affinity the people in the target country feel towards the acquirer’s country
also plays a role. Target country governments are less likely to show nationalist
reactions for acquirers from countries that enjoy a higher level of trust in target
countries.
Both domestic and European politics also matter. Coalition governments
or governments with a small vote share are more likely to show nationalist
reactions. This might be due to the fact that weak governments are more likely to
be influenced by special interest groups. Countries holding the rotational six-
month EU presidency also seem to use their position for more nationalist
reactions during their presidency. The factors that do not seem to play a role are
also of interest. For example, we find no role for the ideology of the ruling party
in target countries, which tend to have center-right or center-left Prime Ministers.
This finding suggests that, among others, the nationalist reactions we document
are unlikely to be motivated by industrial or other economic policies within
mainstream European politics. Similarly, unemployment rate and GDP growth
rate do not seem to play a role, which further suggests that nationalism in mergers
is more likely to be motivated by sociological and political reasons than economic
ones.
It is worth mentioning that the merger attempts that form our sample
actually took place. In other words, bidders in our sample must already have had
sufficiently high expectations of completing the deals before they attempted an
acquisition in the first place. This leads to an underrepresentation of nationalism
cases in our sample. For example, if the domestic government is so nationalist
39
that potential foreign acquirers do not even attempt a bid, no merger bids will be
observed. Similarly, a domestic government may be successful in deterring a
potential acquirer while the bid is still at the rumor stage; such rumored attempts
may not be part of our sample, a few exceptions notwithstanding. Hence, our
analysis is biased against finding nationalism, and the cases of nationalism that
we document are an underestimate of all such cases.
To the extent that the markets are competitive and complete, government
interventions are likely to have negative implications for economic efficiency.
30
With uncompetitive or incomplete markets, government interventions may have
ambiguous effects. In particular, the government intervention creates a takeover
barrier and it might be argued that this may have the beneficial effect of
increasing the takeover premium to domestic shareholders. Usually, it is very
difficult to analyze the effects of such takeover barriers because the same barriers
also prevent some takeover bids from being successful. Econometrically, one
needs an instrument that explains the existence of the takeover barrier but not
directly the premium offered by the acquirer. It is often difficult to find such
instruments in many corporate finance settings but our analysis of political factors
behind the government interventions provides such instruments. Using the
political factors such as government strength or European Commission
presidency, which we identified as significant factors behind the government’s
intervention decision, we showed in section V that the government interventions
do not have the benefit of increasing the takeover premium once their effect on
unsuccessful bids are properly taken into account.
40
Sociological and political factors seem to play a bigger role than economic
factors in explaining nationalism in mergers in our sample but target governments
may also worry about increasing vulnerability to foreign economic shocks
through foreign ownership.
31
Such worries are unlikely to be very important in
explaining economic nationalism in mergers and acquisitions, however, because
most of the acquirers in our sample are from other EU countries with which the
target country’s economy is already substantially integrated. Some countries in
our sample may be viewed as following stakeholder capitalism as opposed to
shareholder capitalism as discussed in Allen, Carletti, and Marquez (2009), who
also argue that the former countries may be more protectionist in mergers and
acquisitions than the latter. Any such incentives to protect stakeholder capitalism
in target countries in our sample must be subtle though, because many of the
acquirers are also from continental European countries that can be viewed as
following stakeholder capitalism. Finally, even if nationalism has an adverse
effect on economic efficiency, citizens of the target country may have a
preference for domestic ownership at the expense of losing the efficiency benefits.
In general, we cannot rule out that the target governments are responding to the
preferences of their citizens.
Our results have interesting implications for the recent sovereign debt
crisis in Europe. It seems that heavily indebted governments may have to sell
some government-owned firms to raise funds, and the ability of domestic
investors to bid for those assets is likely to be limited in the crisis. These
governments will be less likely to afford nationalism than in normal times.
41
Ironically, however, austerity measures demanded by the EU and the International
Monetary Fund also seem to have increased nationalist opposition against
foreigners among the public. It will be interesting to see whether governments
will choose to follow the increased nationalist sentiment and how their actions
will impact the resolution of the crisis.
Our results also suggest several directions for future research. Since
economic nationalism acts as a takeover defense against foreign acquirers as
shown in Section VI, it would be interesting to explore the implications of these
takeover defenses on managerial entrenchment, company valuation, and
diversification as well as acquisitions by domestic companies. Also, because our
sample consists of the largest mergers in a given country, one open question is
whether nationalism is also present in smaller mergers in some form. Another
interesting question we leave for future study is the impact of reduced capital
flows from abroad due to economic nationalism.
42
Appendix A
This appendix discusses the estimation of interaction effects in
multinomial logit models and roughly follows Ai and Norton (2003). Consider the
following general estimation model:
E[y|x]=f(x;
b
),
(A1)
where x is a vector (x1, x2,…, xk), and f (.) is a possibly nonlinear function that is
known up to the parameter(s)
and is twice-continuously differentiable. Suppose
we are interested in the interaction effect between x1 and x2, that is, how the effect
of explanatory variable x1 on the dependent variable y changes with another
explanatory variable x2. This interaction effect, denoted by
12, is given by
m
12 =
2E[y|x]
x1
x2
.
(A2)
Notice that in the usual linear case where
f(x;
b
)=
b
0+
b
1x1+
b
2x2+
b
12x1x2+
b
3x3+...+
b
kxk
, (A3)
12 is given by
12.
Two aspects of the linear case are worth noting. First, the interaction effect
is constant throughout the regression sample. Second, it depends only on
12.
Hence, a consistent estimator of the latter immediately gives the interaction effect.
As Ai and Norton (2003) show, neither of these aspects is valid in general
for a nonlinear f (.), including logit, probit, and multinomial logit functions. The
interaction effect
12 is typically a function of more than one estimated coefficient
and depends on the specific values of x at which it is evaluated. Since
12 depends
on x, we report its average over the regression sample.
43
In our specific case of multinomial logit, we have
E[yi|x]=f(xi;
b
i)
, (A4)
where i=1,…I indexes the choice made by the government with i=1 serving as the
base case of government neutrality and
f(xi;
b
i)
is given by
In our case, x1 is a dummy variable for foreign acquirers so, with the difference
operator replacing the differential operator, (A2) is simplified to
m
12
i=
f(xi;
b
i)
x2x1=1
-
f(xi;
b
i)
x2x1=0
. (A6)
Notice that each term on the right-hand side (RHS) of (A6) gives marginal effects
with respect to x2 evaluated at specific values of x1.
We first use the mlogit command of Stata v.11 to estimate
b
Ù
. We
then use the margins command to calculate average marginal effects for each
independent variable. The interaction effect,
m
12
Ù
, averaged over the regression
sample, is then estimated by calculating the marginal effect terms of the RHS of
(A6) using again the margins command, which also provides standard errors
(see also Cameron and Trivedi (2010), pp. 343-357).
44
Appendix B
In this appendix, we briefly describe some mergers and merger attempts to
illustrate nationalism. We also provide examples of support for foreign acquirers
and opposition to domestic bidders, as these cases are also informative. There are,
of course, many cases in which the government does not intervene. Our aim in
this appendix is not to provide a detailed description of each merger, but rather to
give a flavor of the cases encountered. References in footnotes are given in the
Internet Appendix.
A. Opposition to Foreign Acquirers
Endesa (Spain): This is a merger case that involved multiple bidders from three
different countries, saw the ruling Spanish politicians overrule the Spanish
competition board and later change the merger rules against a foreign bidder,
induced the European Commission to warn the Spanish government against
nationalist responses, and took about two years to resolve. In September 2005,
Spanish energy company Gas Natural made an unsolicited bid for another Spanish
energy company, Endesa. The Spanish government approved the bid for Endesa
despite the rejection recommendation of the Spanish antitrust commission and the
opposition of Endesa management.
32
Endesa was then able to obtain an injunction
in court against the merger.
The acquisition attempt gained an international dimension in February
2006 when the German energy company E.on bid for Endesa. The Spanish
government, through the Spanish energy regulator, imposed additional
requirements for the E.on bid.
33
The European Commission demanded the
45
withdrawal of any requirements that effectively applied only to foreign
acquirers.
34
The Spanish government responded by encouraging Spanish Acciona
and Italian energy company Enel to build a blocking minority share after the end
of the official bidding period despite the objections of the Spanish stock market
regulator. Acciona and Enel eventually built enough stake in 2007 to acquire
Endesa through a holding company that was owned 50.01% by Spanish Acciona.
This was a case in which not only did a domestic government oppose a foreign
bidder and support domestic bidders, but the nationalist policy was so overt that it
attracted explicit warning from the European Commission.
35
Banca Nazionale del Lavoro (Italy):
36
In March 2005, Spanish bank BBVA bid
for Italian bank Banca Nazionale del Lavoro (BNL). The bid required the
approval of the Italian Central Bank.
37
Central bank governor Antonio Fazio
rejected the bid with the support of the Berlusconi government. The
communication minister Maurizio Gasparri summarized the Italian government’s
position as follows: “Yes to competition, no to colonization [of Italian banks]!”
38
When the European Commission warned the Italian government,
39
the
Italian Central bank tried to arrange a leveraged white knight bid by Unipol, an
insurer much smaller than BNL, the target. Unipol made a higher bid
40
and
BBVA withdrew its offer. Central bank governor Fazio had to resign when taped
phone conversations
41
that he made in arranging the white knight bid surfaced.
The new central bank governor did not approve Unipol’s white knight takeover of
BNL for prudential reasons. BBVA did not renew its bid.
42
Scania (Sweden):
43
In September 2006, German truck maker MAN bid for the
46
Swedish truck maker Scania.
44
Sweden’s Prime Minister Fredik Reinfeldt
expressed his government’s opposition as follows: “I hope that this Swedish
industrial crown jewel remains Swedish.…I feel very strongly for those who
make efforts to keep ownership in Sweden and do something to keep headquarters
here in Sweden.”
45
MAN subsequently withdrew its bid.
46
B. Support for Domestic Acquirers
Olivetti controlling Telecom Italia (Italy):
47
Olivetti acquired control of Telecom
Italia through a pyramid structure in 1999. The subsequent decline in the
technology sector left Olivetti highly indebted and made its fellow investors
vulnerable. In July 2001 the Pirelli and Benetton families captured control of
Olivetti, through their own pyramid structure, to control Telecom Italia.
48
The
government’s support for the joint bid is explained by the communications
minister Maurizio Gasparri: “There was the risk of a takeover from foreign
buyers. That would have been in line with the logic of the market. But it also
would have put another large piece of Italy in the hands of a foreigner.”
49
Aventis (France):
50
In April 2004, French pharmaceutical company Sanofi bid for
the larger French pharmaceutical company Aventis. The French government
supported the bid despite the objections of Aventis management.
51
When rumors
surfaced that Swiss pharmaceutical company Novartis was considering a white
knight bid for Sanofi, the government warned Novartis against it and provided
financing for the acquisition through CDC-Ixis, a state-owned bank.
52
No white
knight bid materialized and Sanofi acquired Aventis. Prime Minister Raffarin
explained the reasons behind the government’s support: “We are concerned about
47
the fate of vaccines [against terrorist attack].”
53
C. Support for Foreign Acquirers
Support for foreign acquirers is rare, as demonstrated in the data section,
but it is useful to examine a case in which it did happen.
AGF (France):
54
In October 1997, Italian insurance company Generali bid for the
French insurance company AGF. The French government opposed the acquisition
and delayed giving a technical approval that was necessary for the bid to be
presented to AGF’s shareholders.
55
In the meantime, AGF searched for a white
knight and found one in the German insurance company Allianz.
56
Allianz earned
the French government’s support by promising to keep the management and
operations in France and acquired AGF.
57
D. Opposition to Domestic Acquirers
Opposition to domestic acquirers is also rare, but it is helpful to discuss
one such case.
Iberdrola (Spain):
58
In March 2003, Spanish natural gas distribution and energy
company Gas Natural attempted to acquire Iberdrola, another Spanish energy
company.
59
Gas Natural, a Catalonia-based company, obtained financing from
several banks controlled by the Catalan regional government.
60
The acquisition
attempt was vetoed by the Spanish Energy Commission of the Madrid
government with votes based along party and regional lines.
61
.
48
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1
This quote is French President Charles de Gaulle’s greeting in Italian to François Michelin, who
was summoned to the presidential office upon rumors that he was about to sell the French
carmaker Citroen he controlled to Italian Fiat. Shortly thereafter it was arranged that Peugeot,
another French carmaker, would acquire Citroen. See Betts (2001).
2
Owen (1999).
3
See, for example, Feiler (1935), Knight (1935), Hayek (1937), von Mises ([1943] 1990), Seers
(1983), Olson (1987), and Helleiner and Pickel (2005). Breton (1964, p.377) defines nationalism
as “the investment of present scarce resources for the alteration of the interethnic and international
distribution of ownership.” The different treatment of foreign acquiring firms from domestic ones
that this paper demonstrates is also related to the discrimination literature that starts with Becker
(1957).
4
With respect to our use of the vote share of extreme right parties as a proxy for nationalist
sentiments, it is interesting to note that Frank Knight (1935) focuses on ‘fascist nationalism’ in his
study of economic theory and nationalism.
5
See, for example, Macesich (1985), and Burnell (1986).
6
Dubai Port’s attempt to acquire a Florida port and the attempt by Chinese oil company CNOOC
to acquire U.S. oil company Unocal are some of the better-known examples. Both were withdrawn
after political opposition. It is interesting to note that China retaliated by not allowing Coca Cola
to acquire one of its bottlers in China; see, for example, Petrusic (2006) and The Economist
(March 5, 2009).
7
See the discussion in Shuman (2009), and The Economist (February 5, 2009), among others.
8
Note that we do not study nationalizations, in which the government takes an ownership stake in
firms.
9
For studies on European mergers and acquisitions but without a political economy focus, see, for
example, Rossi and Volpin (2004), Faccio and Masulis (2005), Ferreira, Massa, and Matos (2007),
Bris and Cabolis (2008), and Erel, Jang, and Weisbach (2012). See Erel, Liao, and Weisbach
(2012) for the determinants of cross-border mergers and acquisitions around the world.
53
10
See Council Regulation (EEC) No 4064/89 as amended by Council Regulation (EC) No
1310/97 and hereafter referred as the EC Merger Regulation. This was replaced by Council
Regulation (EC) No 139/2004 but the definition of “community dimension” in Article 1 that
determined the scope of the European Commission’s jurisdiction did not change. In general, the
changes brought by the latter regulation were minor; see Hinds (2006).
11
For banks, “turnover” is calculated as the sum of interest income, income from securities,
commission income, net profit on financial operations, and other income; for insurance
companies, it is the value of gross premiums on policies written; see Article 5 of the EC Merger
Regulation.
12
The 1997 amendment accepted a lower threshold of 2.5 billion Euros of aggregate turnover if a)
in each of the three member states, the aggregate turnover of the merging parties is more than 100
million Euros; and b) the aggregate community-wide turnover of each merging party is more than
100 million Euros.
13
Although it is beyond the scope of this paper, notice that mergers between two companies with
main operations located outside of Europe may still satisfy the community dimension rule and,
hence require the European Commission’s approval. The case of the proposed merger between
General Electric and Honeywell, which was approved by U.S. regulators but rejected by European
regulators, is a good example of the implications of this rule for non-European companies. See
Evans (2002).
14
See Article 21 of the EC Merger Regulation.
15
The following are the keywords that we use to search the body of articles in order to identify
relevant articles: government, minister, politic*, national assembly, parliament, central bank,
nationalism, patriotism, protectionism, champion, industrial jewel, national jewel, industrial
symbol, national symbol, icon, national security, strategic interest, strategic sector, strategic
industry, public interest, national interest, municipal, state-owned, and patriotic.
16
This is less of a problem in time-series analysis where we study the impact of nationalism on
foreign merger bids in the years that immediately followed. If a country has at least one nationalist
54
reaction, time-series analysis can be performed and the overwhelming majority of the countries in
our sample have at least one nationalist reaction in our sample period.
17
See, for example, Hagtvet (1994), van Der Brug, Fennema, and Tillie (2000), Golder (2003),
Givens (2005, esp. pp 68-86), Bjorklund (2007), Wendt (2009), and the references cited below. In
this voluminous literature, Hainsworth (2008) provides a concise book-length treatment and
further references.
18
We thank Christopher Wendt for sharing these data.
19
Unlike the antiforeign preferences of these parties, the role of unemployment in the strength of
these parties is mixed in the political science literature. Arzheimer and Carter (2006) find a
positive correlation while Bjorklund (2007) finds a negative one. Golder (2003) documents a
positive correlation only when the immigrant population in that country is also high.
20
The Internet Appendix is provided in the online version of the article on the Journal of Finance
website.
21
The use of such a survey question as a measure of attitude is not without problems, however. In
addition to the usual concern that people may not behave as they say, the survey we use was only
administered to young Europeans between 15 and 24 years old. Hence, its results may not be
representative of the population at large. However, this is the best survey question that we could
find that covered our sample period.
22
We use the median trust value based on the 1996 survey; see Guiso, Sapienza, and Zingales
(2009) for details about the construction of this variable. We thank Luigi Guiso, Paola Sapienza,
and Luigi Zingales for sharing their data, which include some non-European acquirers such as
Japan and the U.S. Note that participants were asked to report trust scores for people in their own
country as well. Also note that 86.5% of the acquirers in our sample are from Europe (including
the domestic acquirers).
23
The data source is http://www.eurovisioncovers.co.uk/. A given country can cast 1-8, 10, or 12
votes. One complicating econometric issue in using the points given in the Eurovision contest is
that countries cannot vote for themselves. We assumed they all give themselves the maximum
55
points to keep the domestic mergers in the sample and included Ln(Lagged Eurovision Votes) only
as an interaction term.
24
We repeated the analysis with a binary variable for a leftist Prime Minister. We did not find
statistically significant effect.
25
Given that shareholders may be affected by the same sociological factors like affinity or trust
that affect the government’s decision, such factors may not satisfy the exclusivity requirement of a
valid instrument, unlike political factors.
26
We ran our main regression in Table III using only the sample of merger bids with nonmissing
premium data. The results remain robust.
27
We repeated the regressions in Table X using only EC presidency as instrument for the
government support decision. The results are very similar and are presented in in the Internet
Appendix.
28
There are fewer than 50 companies from Luxembourg.
29
We do not follow a firm after it receives an acquisition bid because the government intervention
(or the lack thereof) may carry information about the likelihood of government intervention in the
future and consequently may bias the observation of future bids for that particular company.
30
Perez-Gonzales (2005), Desai, Foley, and Forbes (2008), Chari, Chen, and Dominguez (2009)
provide empirical evidence on the benefits of unimpeded foreign ownership in non-European
contexts.
31
See Peek and Rosengren (2000), who also caution, however, that foreign ownership may also
dampen the effect of domestic shocks.
32
See Crawford (2006).
33
See Crawford and Williamson (2006), and Mulligan (2006).
34
See Buck, Milne, Mulligan (2006).
35
See Mulligan (2007).
36
Our summary is largely based on, among others, Michaels and Mulligan (2005), Buck and
Crawford (2005), Michaels (2005a, 2005b), and Buck (2005b) as well as those cited in the text
below.
56
37
See Barber, Bickerton, Mulligan, and Larsen (2005).
38
See Barber, Bickerton, Crawford, and Michaels (2005).
39
See Buck (2005a).
40
See Financial Times (July 19, 2005).
41
See Minder (2005).
42
See Michaels (2006).
43
Our summary is largely based on, among others, Dow Jones News Service (September 12,
2006), Mackintosh and Milne (2006), Dow Jones News Service (October 12, 2006), Dow Jones
News Service (November 17, 2006), and Dow Jones News Service (November 30, 2006), as well
as those cited in the text below.
44
See Milne (2006).
45
As reported by Dow Jones News Service (December 7, 2006).
46
See Dow Jones Business News (January 23, 2007)
47
Our summary is largely based on, among others, Ratner (2001), Guha (2001), Ratner, Guha, and
Kapner (2001a,b), Kapner, Guha, and Ratner (2001b), and Financial Times (September 20, 2001),
as well as those cited in the text below.
48
See Kapner (2001a).
49
As reported by Kapner (2001b).
50
Our summary is largely based on, among others, Arnold and Simonian (2004), Arnold and
Dombey (2004), Arnold and Johnson (2004), Milne and Simonian (2004), and Arnold, Dyer, and
Smolka (2004), as well as those cited in the text below.
51
See Arnold (2004a).
52
See Arnold (2004b).
53
As reported in Johnson (2004).
54
Our summary is largely based on, among others, Betts and Jack (1997a,b), Fisher and Jack
(1997), Financial Times (November 19, 1997), Financial Times (December 2, 1997), Financial
Times (December 18, 1997), and Jack (1998a, 1998b), as well as those cited in the text below.
55
See Jack (1997).
57
56
See Jack (1997).
57
See Arnold and Milne (2005).
58
Our summary is largely based on, among others, Das Gupta (2003), Crawford (2003), and Levitt
(2003a, 2003b, 2003c, 2003d, 2003e), as well as those cited in the text below.
59
See Crawford (2003).
60
See Levitt (2003b).
61
See Levitt (2003c).
58
Table I
Government Reaction to Domestic and Foreign Merger Bids
This table reports the reaction of the target country’s government to merger bids. The sample contains the largest 25 merger targets by market
capitalization in each of the 15 EU countries as of 1996. If there are competing bidders for the same target, all bids are included so a country’s
total may exceed 25. These countries are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, Spain, Sweden, and the U.K. The sample period is 1997 to 2006. Pearson Chi-squared tests the equality of distributions
between domestic bids and foreign bids across government reactions.
Government Reaction
Opposition
Neutral
Support
Total
Domestic Bids
9
154
34
197
Foreign Bids
28
183
7
218
Total
37
337
41
415
Pearson’s Chi-squared p-value = <0.001
59
Table II
Sample Statistics for Merger Bids
The statistics describe target firms and merger bids that they receive by whether the acquirer is foreign or domestic (Panel A) and by the reaction
of the target country’s government (Panel B). Our sample contains the 25 largest targets in each of the first 15 EU countries (as of 1996) between
1997 and 2006. Market Cap. is the market capitalization of target firms in real Euros as of four weeks before the merger bid. Net Income/Market
Cap is the ratio of the target firm’s net income over market capitalization as of the most recent fiscal year-end before the bid is announced.
Hostile/Unsolicited Bid Dummy takes a value of one if the bid is classified as hostile and/or unsolicited, and zero otherwise. The last row in each
panel reports the number of observations for all variables except the number of observations for Net Income/Market Cap, is in parentheses. p-
values from Wilcoxon rank-sum tests for the medians and mean difference tests for the means (between opposition and support samples in Panel
B) are reported. The symbols ***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively.
Panel A: Nationality of the Acquirer
statistic
Domestic Bidder
Foreign Bidder
p-value
All
Market Cap. (Billions Euro)
median
2.91
1.69
0.40
2.49
Net Income/Market Cap
median
5.8%
5.9%
0.895
5.8%
Hostile/Unsolicited Bid Dummy
mean
16.8%
12.4%
0.21
14.5%
N
197(196)
218(217)
415(413)
Panel B: Government Reaction
statistic
Opposition
Support
p-value
Neutral
All
Market Cap. (Billions Euro)
median
6.3
6.6
0.645
1.4
2.5
Net Income/Market Cap
median
5.8%
5.6%
0.76
5.8%
5.8%
Hostile/Unsolicited Bid Dummy
mean
43.2%
17.1%
0.012**
11.0%
14.5%
Foreign Bidder Dummy
mean
75.7%
17.1%
0.00***
54.3%
52.5%
N
37
41
337(335)
415(413)
60
Table III
Nationalism in Mergers and Acquisitions: Main Regressions
This table reports average marginal effect estimates for a multinomial logit model. The dependent variable is the government reaction, which can
be opposition, support, or the base outcome, no/neutral reaction. Foreign Acquirer Dummy is equal to one if the bidder is not from the same
country as the target firm and zero otherwise. Ln (Market Cap) is the natural logarithm of the target firm’s market capitalization and Net
Income/Market Cap is the ratio of its net income over market cap as of the most recent fiscal year-end before the bid is announced. Competing Bid
Dummy is equal to one if there is a competing bid for the target and zero otherwise. Hostile/Unsolicited Bid Dummy is equal to one if the bid is
classified as hostile and/or unsolicited. Far Right Vote Share is the share of votes obtained by extreme right parties in the most recent election in
the target country before the bid was announced. Heteroskedasticity-robust standard errors, corrected for clustering of observations at the target
country level, are in parentheses. The symbols ***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively.
Government Reaction
(1)
(2)
(3)
Opposition
Support
Opposition
Support
Opposition
Support
Foreign Acquirer Dummy
0.151***
-0.136***
0.113***
-0.125***
(0.039)
(0.016)
(0.036)
(0.019)
Far Right Vote Share
0.005**
0.004***
(0.002)
(0.001)
Foreign Acquirer Dummy*Far Right Vote Share
0.006*
-0.008***
(0.003)
(0.002)
Ln(Market Cap)
0.019***
0.032***
0.016**
0.039***
0.017***
0.024***
(0.006)
(0.011)
(0.006)
(0.011)
(0.005)
(0.008)
Net Income/Market Cap
0.136
0.012
0.134
0.008
0.146
0.037
(0.160)
(0.271)
(0.131)
(0.255)
(0.123)
(0.239)
Competing Bid Dummy
0.065*
0.073**
0.080**
0.065*
0.040
0.061*
(0.039)
(0.032)
(0.036)
(0.039)
(0.036)
(0.033)
Hostile/Unsolicited Bid Dummy
0.083**
-0.005
0.094***
-0.013
0.104***
-0.014
(0.039)
(0.024)
(0.026)
(0.039)
(0.034)
(0.029)
Year FEs
Yes
Yes
Yes
Yes
Yes
Yes
Target Country FEs
Yes
Yes
Yes
Yes
No
No
Target Industry FEs
Yes
Yes
Yes
Yes
Yes
Yes
413
0.339
413
0.417
411
0.295
61
Table IV
Nationalism in Mergers and Acquisitions: Robustness
This table reports average marginal effect estimates for a multinomial logit model. Panel A include tests
for robustness to macroeconomic factors. Panel B includes tests for robustness to acquirer and bid
characteristics. The dependent variable is the government’s reaction, which can be opposition, support, or
the base outcome, no/neutral reaction. Foreign Acquirer Dummy is equal to one if the bidder is not from
the same country as the target firm and zero otherwise. Macroeconomic controls are Target country’s
GDP Growth and Unemployment Rate as a percentage of total labor force (both as of the previous year-
end). Other control variables included but not reported are Ln(Market Cap, Net Income/Market Cap,
Competing Bid Dummy, Hostile/Unsolicited Bid Dummy, Year FEs, and Target Industry FEs (both in
Panels A and B); and Target Nation FEs (only in Panel B). Heteroskedasticity-robust standard errors,
corrected for clustering of observations at the target country level, are in parentheses. The symbols ***,
**, and * indicate significance at the 1%, 5%, and 10% levels, respectively.
Panel A: Robustness to Macroeconomic Factors
Government Reaction
(1)
(2)
Opposition
Support
Opposition
Support
Foreign Acquirer Dummy
0.109***
-0.126***
0.117***
-0.127***
(0.040)
(0.036)
(0.035)
(0.039)
GDP Growth Rate
-0.017
0.009
(0.017)
(0.008)
Foreign Acquirer*GDP Growth
-0.027
0.005
(0.023)
(0.024)
Unemployment Rate
0.007
-0.000
(0.007)
(0.005)
Foreign Acquirer*Unemployment
-0.004
0.003
(0.012)
(0.009)
Observations
413
0.260
413
0.267
Pseudo R2
Panel B: Robustness to Some Acquirer and Bid Characteristics
Government Reaction
(1)
(2)
Oppose
Support
Oppose
Support
Foreign Acquirer Dummy
0.173***
-0.185***
0.149***
-0.136***
(0.040)
(0.040)
(0.040)
(0.032)
Ln(Acquirer Market Cap)
-0.005
-0.009
(0.012)
(0.014)
Acq. Net Income/Mrkt Cap
0.088
-0.349
(0.171)
(0.510)
Stock/Hybrid Payment
0.036
0.101***
(0.031)
(0.016)
Observations
255
0.468
342
0.477
Pseudo R2
62
Table V
Sociological Factors behind Nationalism
This table reports average marginal effect estimates for a multinomial logit model. The dependent variable is the government’s reaction, which can
be opposition, support, or the base outcome, no/neutral reaction. Foreign Acquirer Dummy is equal to one if the bidder is not from the same
country as the target firm and zero otherwise. In each regression, Foreign Acquirer Dummy is interacted with one of the sociological factors. Too
Many Foreigners is the level of percent of people who agree with the statement “There are Too Many Foreigners in my country” in a 1997
Eurobarometer survey; Trust is the median trust felt by the people of the target country for the acquiring firm’s country following Guiso (2009);
and Ln (Lagged Eurovision Votes) is the natural logarithm of the votes the acquiring firm’s country received from the target country in the
Eurovision song contest in the previous year. Same Language (Religion) Dummy equals one if the people in the target and acquirer countries speak
the same language (share the same religion) using data from Stulz and Williamson (2003). Common Border Dummy takes a value of one if the
target and the acquirer countries share a land border or are separated by 24 miles of water or less
(http://www.correlatesofwar.org/COW2%20Data/DirectContiguity/DCV3desc.htm). Heteroskedasticity-robust standard errors, corrected for
clustering of observations at the target country level, are in parentheses. The symbols ***, **, and * indicate significance at the 1%, 5%, and 10%
levels, respectively.
Sociological Factor:
Too Many Foreigners
Trust
Ln(Lagged
Eurovision Votes)
Government Reaction
(1)
(2)
(3)
Opposition
Support
Opposition
Support
Opposition
Support
Foreign Acquirer Dummy
0.110***
-0.139***
0.136***
-0.135***
0.072*
-0.100***
(0.036)
(0.037)
(0.017)
(0.042)
(0.042)
(0.033)
Foreign Acq. Dummy*Sociological Factor
0.007***
-0.002
-0.143***
0.201*
-0.052***
0.020
0.003
0.003
(0.042)
(0.105)
(0.019)
(0.035)
Sociological Factor
0.003
0.001
0.020
-0.036
(0.002)
(0.002)
(0.051)
(0.050)
Target- and Bid-Level Controls
Yes
Yes
Yes
Year FEs
Yes
Yes
Yes
Target Nation FEs
No
Yes
Yes
Industry FEs
Yes
Yes
Yes
Observations
394
395
304
Pseudo R2
0.266
0.458
0.476
63
Table V
Sociological Factors behind Nationalism (continued)
Sociological Factor:
Same Language
Dummy
Same Religion
Dummy
Common Border
Dummy
Government Reaction
(1)
(2)
(3)
Opposition
Support
Opposition
Support
Opposition
Support
Foreign Acquirer Dummy
0.152***
-0.133***
0.157***
-0.132***
0.148***
-0.126***
(0.045)
(0.020)
(0.034)
(0.014)
(0.035)
(0.018)
Foreign Acq. Dummy*Sociological Factor
0.017
-0.003
0.076
-0.005
0.021
0.043
(0.070)
(0.030)
(0.071)
(0.021)
(0.059)
(0.027)
Target- and Bid-Level Controls
Yes
Yes
Yes
Year FEs
Yes
Yes
Yes
Target Nation FEs
Yes
Yes
Yes
Industry FEs
Yes
Yes
Yes
Observations
413
413
413
Pseudo R2
0.417
0.421
0.423
64
Table VI
Political Factors behind Nationalism
This table reports average marginal effect estimates for a multinomial logit model. The dependent variable is the government’s reaction, which can
be opposition, support, or the base outcome, no/neutral reaction. Foreign Acquirer Dummy is equal to one if the bidder is not from the same
country as the target firm and zero otherwise. In each regression, Foreign Acquirer Dummy is interacted with one of the political factors. Right
Leaningness is the ideology of the Prime Minister’s party according to Volkens et al. (2010); Coalition Government is a binary variable that is one
if the ruling government is a multiparty coalition; Government Vote Share is the total vote share of the governing parties in the most recent
parliamentary elections; EU Rotational Presidency is a binary variable that is one if the target country holds the six-month rotational presidency of
the EU when the bid is announced; the European Commission Presidency is a binary variable that is one if the president of the European
Commission is a national of the target country at the time the bid is announced. Heteroskedasticity-robust standard errors, corrected for clustering
of observations at the target country level, are in parentheses. The symbols ***, **, and * indicate significance at the 1%, 5%, and 10% levels,
respectively.
Panel A. Domestic Politics
Political Factor:
Right Leaningness
Coalition Government
Government Vote Share
Government Reaction
(1)
(2)
(3)
Opposition
Support
Opposition
Support
Opposition
Support
Foreign Acquirer Dummy
0.144***
-0.131***
0.143***
-0.136***
0.143***
-0.133***
(0.033)
(0.014)
(0.033)
(0.018)
(0.034)
(0.013)
Foreign Acq. Dummy*Political Factor
-0.002
0.000
0.054
-0.134***
-0.002
0.009***
(0.002)
(0.001)
(0.038)
0.029
(0.005)
(0.003)
Political Factor
0.003
0.001
-0.481***
0.079***
0.002
-0.008**
(0.002)
(0.002)
(0.008)
(0.018)
(0.003)
(0.003)
Target- and Bid-Level Controls
Yes
Yes
Yes
Year FEs
Yes
Yes
Yes
Target Nation FEs
Yes
Yes
Yes
Industry FEs
Yes
Yes
Yes
Observations
413
413
413
Pseudo R2
0.420
0.420
0.429
65
Table VI
Political Factors behind Nationalism (continued)
Panel B. European Union Politics
Political Factor:
EU Rotational Presidency
European Commission Presidency
Government Reaction
(1)
(2)
Opposition
Support
Opposition
Support
Foreign Acquirer Dummy
0.145***
-0.132***
0.137***
-0.134***
(0.034)
(0.015)
(0.030)
(0.015)
Foreign Acq. Dummy*Political Factor
0.176**
-0.187
-0.053
0.088***
(0.086)
(0.118)
(0.125)
(0.021)
Political Factor
0.051
0.063
-0.068
-0.078***
(0.048)
(0.055)
(0.047)
(0.012)
Target- and Bid-Level Controls
Yes
Yes
Year FEs
Yes
Yes
Target Nation FEs
Yes
Yes
Industry FEs
Yes
Yes
Observations
413
413
Pseudo R2
0.423
0.437
66
Table VII
Impact of Nationalism on Merger Outcomes: Univariate Analysis
This table reports the reaction (opposition, neutral/no reaction, and support) of the target
country’s government and the success/failure of the merger bids. The sample contains the 25
largest merger targets by market capitalization in each of the 15 EU countries as of 1996. If there
are multiple bidders for the same target, all bids are included so a country’s total may exceed 25.
The sample period is 1997 to 2006. Pearson Chi-squared tests the equality of distributions
between failed bids and successful bids across the government reactions.
Government Reaction
Opposition
Neutral
Support
Total
Failed Bids
26
120
11
157
Successful Bids
11
217
30
258
Total
37
337
41
415
Pearson’s Chi-squared p-value = <0.001
67
Table VIII
Impact of Nationalism on Merger Outcomes
This table reports coefficient estimates for a logit model. The dependent variable is equal to one if the
merger bid is successfully completed, that is the merger takes place, and zero otherwise. Government
Opposition takes a value of one if the target country’s government opposes the merger. Government
Support Dummy is equal to one if the government of the target firm supports the merger. Foreign
Acquirer Dummy is equal to one if the bidder is not from the same country as the target, and zero
otherwise. Firm-level controls are the natural logarithm of the target firm’s market capitalization and the
ratio of its net income over market cap as of the most recent fiscal year-end before the bid is announced.
Competing Bid Dummy is equal to one if there is a competing bid for the target, and zero otherwise.
Hostile/Unsolicited Bid Dummy is equal to one if the bid is classified as hostile and/or unsolicited.
European Commission Intervention equals one if the European Commission intervenes in the merger, and
zero otherwise. Ln (Acquirer Market Cap) is the natural logarithm of the acquirer’s market capitalization
as of the most recent fiscal year-end before the bid is announced. Regressions include target industry,
target country, and year fixed effects. Heteroskedasticity-robust standard errors, corrected for clustering
of observations at the target country level, are in parentheses. The symbols ***, **, and * indicate
significance at the 1%, 5%, and 10% levels, respectively.
Successful Bid
(1)
(2)
(3)
(4)
Government Opposition
-1.103*
-1.570***
-1.758*
(0.605)
(0.587)
(0.938)
Government Support
0.874**
0.693*
1.158**
(0.443)
(0.415)
(0.496)
Foreign Acquirer Dummy
-0.293
-0.029
-0.088
0.353
(0.256)
(0.283)
(0.291)
(0.459)
Ln(Market Cap)
-0.235**
-0.245**
-0.261**
-0.050
(0.117)
(0.120)
(0.120)
(0.093)
Net Income/Market Cap.
1.321
1.592
1.532
1.266
(1.033)
(1.142)
(1.097)
(0.869)
Competing Bid Dummy
-0.766***
-0.774**
-0.774**
-1.744***
(0.269)
(0.309)
(0.350)
(0.549)
Hostile/Unsolicited Bid Dummy
-0.612*
-0.444
-0.416
-0.400
(0.326)
(0.375)
(0.384)
(0.784)
European Commission Intervention
1.472**
(0.616)
Ln(Acquirer Market Cap)
-0.241
(0.173)
Year FEs
Yes
Yes
Yes
Yes
Target Country FEs
Yes
Yes
Yes
Yes
Target Industry FEs
Yes
Yes
Yes
Yes
Observations
413
413
413
248
Pseudo R2
0.098
0.122
0.144
0.213
68
Table IX
Impact of Nationalism on Premium Offered: Univariate Analysis
This table reports statistics on the premium offered by the reaction (opposition, support, and
neutral/no reaction) of the target country’s government (Panel A) and the success/failure of the
merger bids (Panel B). Premium Offered is calculated as the final price offered minus the target’s
stock price as of four weeks before the announcement, normalized by the latter. It is winsorized
at the 5% and 95% levels. p-values from mean difference tests for the means (between
opposition and support samples in Panel A) and Wilcoxon rank-sum tests for the medians are
reported. The symbols ***, ** and, * indicate significance at the 1%, 5%, and 10% levels,
respectively.
Panel A: Government Reaction
Premium Offered (%)
Observations
Mean
Median
Std Dev.
Opposition
28
43.60
30.71
36.67
Support
34
33.02
24.26
29.97
Neutral/No Reaction
244
28.70
20.02
32.10
p-value from Mean Difference Test
(Opposition vs. Support)
0.23
p-value from Wilcoxon Rank-sum Test
(Opposition vs. Support)
0.18
Panel B: Merger Outcome
Premium Offered (%)
Observations
Mean
Median
Std Dev.
Failed Bids
82
31.70
25.69
31.80
Successful Bids
224
30.12
21.15
32.81
p-value from Mean Difference Test
0.70
P-value from Wilcoxon Rank-sum Test
0.41
69
Table X
Impact of Nationalism on Premiums Offered
This table reports results of instrumental variables estimation. The first two regressions of each panel
report estimates from a first-stage probit model, where the dependent variable is the government reaction:
Opposition or Support (the target country government’s lack of reaction or neutrality is the omitted
category in the second stage). Predicted values from these regressions are used as instruments for
government opposition and support to explain the merger premium offered to the targets. Premium
Offered, the dependent variable in the second stage reported in Panel A, is calculated as the final price
offered minus the target’s stock price as of four weeks before the announcement, normalized by the latter.
In Panel B’s last column, this variable is multiplied by the successful bid dummy, creating the dependent
variable Premium Received. Both dependent variables are winsorized at the 5% and 95% levels. The F-
statistic tests the joint significance of the instruments. Heteroskedasticity-robust standard errors, corrected
for clustering of observations at the target country level, are in parentheses. The symbols ***, **, and *
indicate significance at the 1%, 5%, and 10% levels, respectively.
Panel A: Premium Offered
Panel B: Premium Received
First Stage
Probit
Second
Stage
First Stage
Probit
Second
Stage
(1)
(2)
(3)
(1)
(2)
(3)
Opposition
Support
Premium
Opposition
Support
Premium
Coalition Dummy
-3.328***
-3.752***
(0.870)
(1.083)
Govt. Vote Share
-0.068*
-0.056*
(0.038)
(0.033)
EC Presidency Dummy
-1.235***
-0.851***
(0.336)
(0.234)
Opposition (Instrumented)
19.249
-12.769
(18.368)
(18.653)
Support (Instrumented)
6.240
5.875
(17.838)
(17.298)
Foreign Acquirer Dummy
1.190**
-1.334***
1.822
1.364***
-1.304***
-1.246
(0.541)
(0.397)
(5.994)
(0.463)
(0.245)
(4.995)
Ln(MarketCap)
0.099
0.343***
-1.072
0.127
0.223**
-2.159
(0.094)
(0.114)
(1.963)
(0.084)
(0.088)
(1.518)
Net Income/Market Cap
1.314
1.083
22.793
0.974
-0.226
11.791
(1.857)
(2.393)
(23.610)
(1.472)
(1.726)
(8.630)
Competing Bid Dummy
1.139***
0.485*
12.605*
0.992***
0.540*
6.038
(0.383)
(0.250)
(6.979)
(0.334)
(0.283)
(4.969)
Hostile/Unsolic. Bid Dummy
1.209***
-0.233
7.481
0.981***
-0.089
4.719
(0.462)
(0.274)
(4.478)
(0.304)
(0.228)
(6.066)
Target Nation FEs
Yes
Yes
Yes
Yes
Yes
Yes
Target Industry FEs
Yes
Yes
Yes
Yes
Yes
Yes
Year FEs
Yes
Yes
Yes
Yes
Yes
Yes
Observations
306
306
306
380
380
380
Pseudo R2/R2
0.457
0.429
0.211
0.408
0.382
0.104
F-Statistics
14.65***
15.92***
12.01***
15.10***
70
Table XI
Deterrent Effect of Nationalism on Future Foreign Merger Attempts
This table presents results from estimating a firm-level Cox proportional hazard regression for a company
to receive its first foreign acquisition bid. The sample is the top 50 listed companies in each country
(except Luxembourg) as of the end of 1996. The variable 1st Half-Year is a dummy variable that takes the
value of one in the first six months after a nationalist reaction in the target country, where nationalist
reaction is defined as opposition to foreign bidders or support for domestic bidders; the other half year
dummy variables are defined accordingly. For regressions under “Most Recent Nationalist Intervention
Only”, these variables are constructed based on the most recent nationalist reaction in that country, that
is, at most one of these variables can be one at a given time. For regressions under “All Nationalist
Interventions in The Previous 3 Years”, these variables are constructed based on all the nationalist
reactions in the previous three years in that country, that is, more than one of these variables can be one
at a given time. Firm-level and macroeconomic controls are as of the most recent fiscal year-end and as
of the previous year-end, respectively. Regressions include target industry and target country fixed
effects. Heteroskedasticity-robust standard errors, clustered at the target country level, are in parentheses.
*, **, *** denote statistical significance at the 10%, 5%, and 1% levels, respectively.
Most Recent Nationalist
Intervention Only
All Nationalist Interventions
in the Previous 3 Years
Ln (Market cap)
0.170*
0.163
0.132
0.167
0.135
(0.101)
(0.103)
(0.096)
(0.103)
(0.095)
Net Income/Market Cap.
-0.058
-0.060
0.008
-0.059
0.006
(0.055)
(0.059)
(0.045)
(0.057)
(0.044)
Gdp Growth Rate
-0.161
-0.091
-0.089
-0.102
-0.100
(0.128)
(0.118)
(0.132)
(0.122)
(0.134)
Unemployment Rate
0.001
-0.007
-0.030
-0.016
-0.048
(0.069)
(0.070)
(0.076)
(0.069)
(0.080)
After Nationalism
1st Half-Year
-0.544
-0.677
-0.092
-0.194
(0.595)
(0.661)
(0.603)
(0.652)
2nd Half-Year
-1.256**
-1.351**
-0.472
-0.602
(0.509)
(0.536)
(0.512)
(0.526)
3rd Half-Year
-2.711***
-2.678***
-1.491***
-1.460**
(1.014)
(0.996)
(0.560)
(0.576)
4th Half-Year
-2.008*
-2.058*
-1.343*
-1.404*
(1.066)
(1.076)
(0.792)
(0.764)
5th Half-Year
-1.147*
-1.227*
-0.861*
-0.904*
(0.695)
(0.680)
(0.511)
(0.507)
6th Half-Year
-0.528
-0.495
-0.149
-0.103
(0.762)
(0.752)
(0.553)
(0.564)
Industry FE
Yes
Yes
Yes
Yes
Yes
Target country FE
Yes
Yes
Yes
Yes
Yes
Sample
Countries
with
Nationalism
Only
Countries
with
Nationalism
Only
All Countries
Countries
with
Nationalism
Only
All Countries
Number of Firms
624
624
721
624
721
Firm-Years at Risk
5232
5232
6098
5232
6098
71
Table XII
Deterrent Effect of Nationalism on Future Foreign Merger Attempts
Country-Level Analysis
This table presents results from estimating a country-level Cox proportional hazard regression for one of
the top 50 listed companies in that country as of the end of 1996 (except Luxembourg) to receive a
foreign acquisition bid. The variable 1st Half-Year is a dummy variable that takes the value of one in the
first six months after a nationalist reaction in the target country, where nationalist reaction is defined as
opposition to foreign bidders or support for domestic bidders; the other half year dummy variables are
defined accordingly. For regressions under “Most Recent Nationalist Intervention Only,” these variables
are constructed based on the most recent nationalist reaction in that country, that is, at most one of these
variables can be one at a given time. For regressions under “All Nationalist Interventions in the Previous
3 Years”, these variables are constructed based on all the nationalist reactions in the previous three years
in that country, that is, more than one of these variables can be one at a given time. Macroeconomic
control variables are as of the previous year-end. Heteroskedasticity-robust standard errors, clustered at
the country-level, are in parentheses. *, **, and *** denote statistical significance at the 10%, 5%, and
1% levels, respectively.
Most Recent Nationalist
Intervention Only
All Nationalist Interventions
in the Previous 3 Years
Gdp Growth Rate
-0.000
-0.026
(0.058)
(0.052)
Unemployment Rate
-0.041
-0.033
(0.048)
(0.041)
After Nationalism
1st Half-Year
-0.165
0.433
(0.395)
(0.376)
2nd Half-Year
-1.119**
-0.709
(0.523)
(0.484)
3rd Half-Year
-1.929**
-1.217***
(0.961)
(0.433)
4th Half-Year
-1.909**
-1.612**
(0.962)
(0.743)
5th Half-Year
-0.640
-0.704**
(0.423)
(0.347)
6th Half-Year
0.152
-0.082
(0.620)
(0.404)
Number of Countries
15
15
Country-Years at Risk
150
150
Article
Full-text available
This study investigates the influence of foreign takeover protection triggered by investment‐related national security screening laws and regulations on firm innovation efficiency. Drawing on agency theory, we argue that an increase in foreign takeover protection can lead to a reduction in innovation efficiency—the amount of innovation output relative to innovation input—by encouraging managerial entrenchment that can result in ineffective allocation and use of R&D resources. Such effects are weaker in the presence of monitoring from external governance actors—dedicated institutional investors and financial analysts. Using the enactment of the Foreign Investment and National Security Act in the United States as our empirical context, we find support for our arguments. Many countries have enacted investment‐related national security screening laws and regulations to protect domestic high‐tech firms from foreign acquisitions. Although the goal of these laws and regulations is to retain the country's leadership position in global innovation, it may unintendedly lead to a reduction in firm innovation efficiency—the effectiveness in transforming innovation input to output—by encouraging managerial entrenchment that can give rise to ineffective allocation and use of R&D resources. Such effect is weaker when other external governance actors, such as dedicated institutional investors and financial analysts, impose stronger monitoring on managers. Our arguments are supported by empirical analyses in the context of the enactment of the Foreign Investment and National Security Act in the United States.
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The increasing globalization of economies has leveraged protectionist attitudes in different countries during the last decades. In the context of cross-border mergers and acquisitions (M&A), national governments have intervened to “protect” big domestic firms and their industries from foreign bidders. Despite the potential for severe implications of these actions on the internationalization of firms and development of markets, the research in this area is relatively scarce, and we still know very little about the real causes and consequences of government intervention. In this paper, we study government opposition to cross-border European M&A during the period 1997-2017, an era of important changes in Europe. Using an event study methodology, we examine abnormal returns for targets and their rivals in the time period prior to actual intervention to gauge if investors perceive intervened deals as harmful events for the industry, which could justify government intervention. We use a hand collected sample of 1,574 EU15 rival firms for 48 mergers, of which 18 experience government intervention. Entropy balanced regression models show that rivals of intervened targets earn significantly lower returns relative to rivals of non-intervened targets on deal announcement. Nevertheless, rivals’ abnormal returns are not negative, suggesting that intervened deals are not perceived ex ante as harmful for industry competitiveness. The results are more consistent with investors’ ability to identify likely blocked deals, which puts downward pressure on abnormal returns to both the target companies and their rivals. These findings indicate that government interventions against foreign bidders seem to have an economic cost in the sector that is anticipated by the investors.
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The world is witnessing a growth in economic nationalism, especially in countries like the United States and United Kingdom, where this would scarcely have been predicted a few years ago. These developments threaten the internationalization of services and gains made through various global trading arrangements. Moreover, there are concerns that the COVID-19 pandemic will further undermine supranational forms of governance and nurture the trend towards protectionism and economic nationalism. We undertake a systemic literature review on economic nationalism and services internationalization to identify research themes. The findings of the study have implications for policymakers, and we provide directions for future research.
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Using a large sample of cross-border deals, we find an inverted U-shaped relationship between corruption distance and cross-border acquisition (CBA) volume. CBAs involving higher corruption distance show negative post-acquisition performance. However, MNEs with larger equity stake deliver superior gains. We find that the ownership strategy varies with levels of corruption distance. MNEs mitigate adverse selection and moral hazard problems by acquiring targets from a related industry and targets with a foothold. We demonstrate that CBA activity and ownership strategy vary between developed and emerging economies, and both ‘level’ and ‘direction’ of corruption distance are important in its effect on CBAs. This article is protected by copyright. All rights reserved.
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Purpose The paper aims to reveal the attitude of the Russian competition authorities towards cross-border mergers involving foreign buyers. The study addresses the following question: Is the probability of Russian competition authorities' intervention significantly different when a foreign buyer takes part in the merger? This is the key test to reveal whether competition authorities gravitate towards “economic nationalism” or “promotion of foreign investments”. Design/methodology/approach The discrete choice model is applied to the dataset of 7,607 merger cases investigated by the Russian competition authorities between 2012 and 2017. The probability of competition authorities' intervention, such as merger correction by using remedies or deal rejection, is used as a measure of special attention. Findings The study finds out favoritism patterns of the regulator with regard to foreign companies. In particular, the deals involving a foreign buyer had less chance of intervention, i.e. imposition of remedies, from national competition authorities. The sanctions period does not moderate the probability of approval of a cross-border merger with foreign buyers by the Russian competition authorities. Originality/value The paper contributes to merger control literature by addressing the political economy issues. It discovers that, besides regulation by the law, there are hidden motives, such as protectionism or favoritism of foreign companies, which could drive the regulator's decision. Therefore, the studies of cross-border mergers provide an opportunity to investigate the political issues of merger control through the identification of a special attitude to foreign companies and analysis of regularities that might explain such a policy.
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The Belt and Road Initiative was introduced to further economic connections with partner countries and foster development within China. We examine the effect of the Initiative on Chinese cross-border M&As. We find that the Initiative significantly increases the probability and the transaction amount of M&A deals in target countries. Moreover, the market reacts more positively to these deals. We find that the effect is entirely driven by state-owned enterprises during our sample period and it is more pronounced in firms that are located on the more-developed eastern coast of China. The evidence suggests that the announcement of the Belt and Road Initiative was followed by economically meaningful cross-border M&A in targeted countries.
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Purpose This paper aims to carry out a qualitative analysis to compare India and China as a choice of service-provider from the perspective of Japanese MNEs for information technology (IT)-IT enabled services (ITeS) offshoring destination, using the four dimensions of the cultural-administrative-geographic-economic (CAGE) distance framework by Ghemawat (2001). Design/methodology/approach This exploratory study used a mix of primary and secondary evidence to carry out a comparative evaluation of the challenges and synergies existent between India and Japan relative to China and Japan, in the context of IT-ITeS offshoring industry. Fourteen semi-structured interviews were conducted with multiple stakeholders and the findings were classified using the CAGE framework. Findings The paper discusses that for IT-ITeS industry, owing to its characteristics and the changing global order in the post-pandemic world, the “distances” that matter the most for business engagement between countries are – cultural, administrative and economic. Based on the comparative analysis, it was seen that China fares better than India, from a Japanese perspective, for the case of cultural and geographic distances while India had an advantage in the case of administrative and economic distances. Thus, India and Japan seem to have higher synergies and potential mutual gains by expanding engagement in the IT-ITeS industry in future. Research limitations/implications One of the limitations of this paper was the lack of comparable secondary data source concerning the size, growth rates, exports, employment figures for China that could have helped establish the contrast in the structure of IT-ITeS industry of India and China. Originality/value This study provides a framework for a comparative analysis of multiple facets of “distance” between competing service providing nations at bilateral, as well as unilateral level, in a holistic manner for the IT-ITeS offshoring industry. The results thus provide the gaps that shall be bridged by the policymakers for realizing mutual benefits.
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There is evidence to suggest that cross-border acquisitions by emerging market firms exhibit a wave-like pattern. In this paper, we examine the timing of cross-border acquisitions with a strategic asset-seeking motive within cross-border acquisition waves. Our findings suggest that emerging market firms are more likely to pursue acquisitions with a strategic asset-seeking motive during the early and decline phases of the wave, and lower during the wave peak. Further, we show that business group affiliation and foreign institutional shareholding moderate the relationship, thereby strengthening the propensity to pursue strategic asset-seeking acquisitions during the early phase of the wave. Our study based on a sample of 312 cross-border acquisitions conducted by Indian firms, provides support for our hypotheses.
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We examine the effects of economic policy uncertainty (EPU) on cross-border mergers and acquisitions (CBAs). The results show that a higher degree of EPU at home retards the number and volume of inbound CBA deals. However, this effect is positively moderated by the host country’s better quality of institution, business environment and political risk. The bilateral acquirer-target country-pair investigation reveals that while higher EPU in the target’s domicile deters inbound CBAs, higher EPU in the acquirer’s nation is positively associated with a higher number and volume of outbound CBA deals. Finally, on the announcement of the deals, targets (acquirers) based in countries with a larger increase in EPU are associated with lower (more) stock returns than the targets (acquirers) based in countries with a smaller increase in EPU. These findings imply that countries aiming to attract cross-border investments should strive to mitigate economic policy-related uncertainties.
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This paper investigates the moderating effect of political affinity between countries on investors’ reactions to the premium in cross‐border acquisitions (CBAs). Based on a sample of 1,183 CBAs between 1999 and 2018, we find that political affinity positively moderates the relationship between the acquisition premium and the acquiring and target firms’ stock market return. We argue that investors use political affinity to assess the reliability of the premium (i.e., management's overall perception of a given deal's synergistic potential). This is in line with prior literature reasoning that, unlike strong political affinity, weak political affinity increases the likelihood of government intervention, decreases the likelihood of deal completion, and results in higher premiums to mitigate the previous effects, thus potentially increasing the likelihood of value destruction. This article is protected by copyright. All rights reserved.