Japanese Foreign Direct Investment: Wealth Effects from Purchases and Sales of U.S. Assets
Pettway, Richard H., Sicherman, Neil W., Spiess, D. Katherine, Financial Management
As the dollar has depreciated relative to many foreign currencies recently, foreign acquisitions of U.S. firms and assets have increased.(1) In the 1970s and early 1980s, most foreign acquirers were from the UK, Canada, and the Netherlands. By 1987, Japanese individuals and companies owned or controlled more U.S. assets than did any other class of foreign investors.(2)
This paper addresses several key issues regarding Japanese direct investment in the U.S. The market for cross-border direct investment may be competitive with all the potential gains accruing to the sellers or there may be significant advantages and/or imperfections in the market for foreign assets that allow the purchasers to gain wealth. The wealth effects from direct investments in U.S. firms and units by Japanese buyers may be different from the wealth effects observed from domestic purchases of U.S. firms and units. Moreover, several economic factors should be related to the wealth impacts of these acquisitions. Cakici, Hessel, and Tandon |4~, Cebenoyan, Papaioannou, and Travlos |5~, Harris and Ravenscraft |12~, and Servaes and Zenner |32~ have studied the wealth effects of foreign acquisitions on U.S. sellers. However, the purposes of this paper are to examine the wealth effects of Japanese purchases of U.S. assets, to measure these effects for both Japanese buyers and U.S. sellers, and to explain the sources of these wealth effects.
I. Literature Review
Under the assumption that cross-border acquisitions markets are competitive, research on foreign acquisitions of U.S. assets has focused on the impacts on the U.S. sellers. Cakici, Hessel, and Tandon |41 find that U.S. target firms that were purchased by foreign firms earn an average 22% abnormal return at announcement. The magnitude of abnormal returns for U.S. targets of foreign bidders is similar to the level of abnormal returns found for U.S. targets of domestic firms. They also find that the highest levels of abnormal returns to targets are from Japanese purchases, followed by Canadian, British, and German acquisitions.
Harris and Ravenscraft |12~ find that U.S. targets gain significantly greater wealth when acquired by a foreign bidder rather than a domestic bidder. They analyze the relationships between these wealth gains and industry characteristics, tax effects, exchange rate level and the bidder's experience. Their results suggest that exchange rate movements have a significant impact on foreign direct investment, but they find that the wealth effects are not well-explained by industry or tax variables.
Servaes and Zenner |32~ measure the U.S. selling-firm wealth effects of foreign direct investment for 112 takeovers during the period 1979-1988. These U.S. targets experienced significant abnormal returns at announcement, but these gains were much higher in 1987 and 1988 than during the earlier time periods. They also find significant announcement period gains for the U.S. sellers of divested assets. These gains are dependent on the year the divestiture occurred. The authors conclude that there are intertemporal variations in returns to sellers that are related to U.S. tax code changes during the study period. Further, the gains to U.S. sellers are inversely related to a monthly exchange-rate index. The authors also examine the returns on 70 foreign acquiring companies by looking at the returns on the shares traded as U.S. depository receipts in U.S. capital markets. They find that there are no significant gains at announcement for this group.
Cebenoyan, Papaioannou, and Travlos |5~ compare the U.S. sellers' wealth effects from 73 foreign bids and 134 domestic bids between 1977 and 1987. They argue that cross-border expansion can involve incremental benefits not available in domestic acquisitions. Their results indicate that target firm wealth effects are not consistently superior to the wealth gains from domestic takeovers. Although exchange rates, tax regime, and the technology sector are significant in some regressions, foreign takeover competition is found to offer the most consistent explanation of the difference in wealth gains of U. …