Academic journal article Journal of Economics and Finance

Macroeconomic Factors and Firm's Cross-Border Merger and Acquisitions

Academic journal article Journal of Economics and Finance

Macroeconomic Factors and Firm's Cross-Border Merger and Acquisitions

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1 Introduction

There have been significant numbers of studies on the effect of local merger and acquisition activity on a firm's shareholders wealth. However, the results have been inconclusive. For instance, the meta-analysis conducted by Homberg et al. (2009)and Cartwright and Schoenberg (2006), shows that the wealth effect resulting from withinborder mergers and acquisitions range from value-additive to value neutral. Such results are in accordance with the financial theory that suggests that diversification via merger and acquisition at the corporate level is redundant.

This is because in a capital market that is relatively efficient, investors can directly derive the gains of such diversification by holding a diversified portfolio.

On the other hand, cross-border diversification via mergers and acquisitions, M&A, could yield benefits to firms that might not be fully realized by shareholders through cross-corporate, domestic, portfolio diversification. Therefore, cross-border diversification may produce greater wealth effects. These cross-border diversification benefits arise from the firm's greater ability to exploit the strategic advantage of countries with differences in variables such as natural resources, tax structure, government regulations, technology, trade agreement, correlations between countries' economics cycles and even monopolistic market power.

Empirical evidence indicates that a firms' ability to exploit these differences in macroeconomics factors can be value enhancing. Manzon et al. (1994) show that in the 1990's, US multinationals derived incremental benefits from foreign acquisitions with the introduction of the new Internal Revenue Code. US multinationals were able to do so by utilizing their international financial network to selectively repatriate dividends or foreign income in a manner that brings greatest tax benefits. Evenett (2003)studies cross-border M&A and evaluates the effect of US acquisitions in 13 OECD countries in banking. Empirical results show that profitable acquisitions made by US multinationals depended on the characteristics of the target country, such as gross domestic product (GDP), distance from the U.S., corporate tax rate, average tariff rate, and the type of legal system. Rossi and Volpin (2004) conduct an econometric study on cross-country determinants of international and domestic M&A. They report that firms in countries with weaker investor protection are more likely to be acquired than those in countries with stronger investor protection, whereas buyers are more likely to be from countries with relatively strong investor protection.

In this study, we argue that the benefits of country diversification via M&A are closely related to the degree of difference in the macroeconomic factors of the countries in the study. The greater the divergence, the better the opportunities for firms to realize the benefits of country diversification. Therefore, we hypothesize that abnormal returns are significantly related to the macroeconomics factors of the host countries. The primary objective of this study is to investigate the wealth effect of cross-border M&A on Malaysian multinationals firms. This study further explores the differences in wealth effects of firms with respect to the macroeconomics factors in the countries in which the foreign target companies domicile.

Malaysia, among the developing economies in Asian region, has long been identified as the target of FDI flows from developed nations. However, since the mid-1970s, Malaysian companies have started outward foreign direct investment (OFDI). From 1993 onwards, Malaysian multinationals participated increasingly in investment activities abroad. According to UNCTAD (2006), for the period of 1990-2005, Malaysian outward FDI grew from USD 129 million to USD 2,971 million of FDI outflows. Malaysia is now recognized as a significant contributor of outward FDI from Asian developing economies. …

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