(PDF) Economic Nationalism in Mergers and Acquisitions

*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

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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

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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,

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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.

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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.

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 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

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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 government’s

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

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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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52

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%

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

Target Country FEs

Yes

No

Target Industry FEs

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)

(0.032)

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)

(0.033)

Foreign Acq. Dummy*Sociological Factor

0.007***

-0.002

-0.143***

0.201*

-0.052***

0.020

0.003

(0.042)

(0.105)

(0.019)

(0.035)

Sociological Factor

0.003

0.001

0.020

-0.036

(0.002)

(0.051)

(0.050)

Target- and Bid-Level Controls

Yes

Year FEs

Yes

Target Nation FEs

No

Yes

Industry FEs

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

Year FEs

Yes

Target Nation FEs

Yes

Industry FEs

Yes

Observations

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)

(0.008)

(0.018)

(0.003)

Target- and Bid-Level Controls

Yes

Year FEs

Yes

Target Nation FEs

Yes

Industry FEs

Yes

Observations

413

Pseudo R2

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

Year FEs

Yes

Target Nation FEs

Yes

Industry FEs

Yes

Observations

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)

(0.093)

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**

-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

Target Country FEs

Yes

Target Industry FEs

Yes

Observations

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

Target Industry FEs

Yes

Year FEs

Yes

Observations

306

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

Target country FE

Yes

Sample

Countries

with

Nationalism

Only

Countries

with

Nationalism

Only

All Countries

Countries

with

Nationalism

Only

All Countries

Number of Firms

624

721

624

721

Firm-Years at Risk

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

Country-Years at Risk

150

Economic Nationalism in Mergers and Acquisitions

Abstract