“Institutions and China Premiums in Cross‐Border M&A” by Professor Changqi Wu
Professor Changqi Wu
Professor of Strategic Management
Guanghua School of Management
Institutional environment is a very important factor in studying cross‐border M&As. However, the role of the institutional environment in influencing cross‐border M&A premiums is under studied. This is an important gap because it is a common but under‐recognized phenomenon that emerging economies, such as China, often overpay in acquiring foreign targets. To fill this gap, we study the role of the institutional environment in affecting the size of acquisition premiums. Based on cross‐border M&A data of Chinese multinational firms, we find a positive relationship between institutional distance and premiums. The larger the institutional distance between home and host country, the larger the premium is paid for the target. Furthermore, in order to better understand the nature of the institutional environment, we study the distinctive characteristics of the institutional environment of host country which is often referred to as the institutional quality. Our results contribute by showing that when the institutional quality of the host country is good, the premium is reduced. In addition, when the acquirer and target are in related industries, the effect of institutional distance on the acquisition premiums is mitigated. Furthermore, we contribute to and differ from the previous studies by finding that the acquirer’s cross‐border M&A experience does not help as expected in reducing the premiums. Our results have both theoretical and practical implications.