Gains to Chinese Bidder Firms: Domestic vs. Foreign Acquisitions

AuthorAngelos J. Doukas,Jie (Michael) Guo,Emma L. Black,Xiaofei Xing
Date01 November 2015
Published date01 November 2015
Gains to Chinese Bidder Firms:
Domestic vs. Foreign Acquisitions
Emma L. Black
Newcastle University Business School, Newcastle University, 5 Barrack Road, NewcastleUponTyne,
Angelos J. Doukas
Deree College, The American College of Greece, DC 709, AP campus 6, Gravias Street, Aghia
Paraskevi, Attica 153 42, Greece
Xiaofei Xing
Durham University Business School, Durham University, Mill Hill Lane, DH1 3LB, UK
Jie (Michael) Guo
Durham University Business School, China Development and Research Centre
This paper examines whether foreign acquisition of Chinese f‌irms improves share
price performance relative to domestic acquisitions. The results show that foreign
acquisitions are not associated with positive abnormal returns in the shortrun, but
that they are so associated for domestic acquisitions. Foreign acquisitions also
realise signif‌icant longrun gains, especially when the acquiring f‌irm is large.
Specif‌ically, we f‌ind that there is a signif‌icant, positive longrun outperformance of
29.81% for large foreign acquisitions benchmarked against domestic ones, while
large foreign acquisitions earn 22.39% in aggregate. Our evidence suggests that
large Chinese acquirers gain when they expand their operations abroad, consistent
with the literature on reverse internalisation.
Keywords: mergers and acquisitions, China, financial performance, scarcity, cross
border, foreign direct investment, multinational, diversification
JEL classification: G14, G34
Comments received throughout development of this work are gratefully acknowledged.
Special thanks go to John Doukas, an anonymous referee, as well as participants at the 2011
EFMA Asian Financial Management Symposium for valuable comments and suggestions.
Correspondence: Jie (Michael) Guo
European Financial Management, Vol. 21, No. 5, 2015, 905935
doi: 10.1111/j.1468-036X.2013.12031.x
© 2013 John Wiley & Sons Ltd
1. Introduction
China has catapulted onto the global socioeconomic landscape in recent times.
Globalisation and f‌inancial market integration have made China a central and integral part
of the global economic landscape, igniting a plethora of political concerns. There is scarce
specif‌ic literature, and the wider work related to mergers and acquisitions (M&As) is
virtually inapplicable with respect to the unique idiosyncrasies regarding the performance
of Chinese f‌irms engaged in foreign acquisitions relative to domestic ones. We aim to f‌ill
this gap by examining shortterm market reaction to merger announcements of Chinese
acquirers as well as their longterm, postmerger share price performance, stratifying the
sample according to whether the target is domestic or foreign.
Since the economic reform of 1978, China has maintained a high economic growth rate
and now ranks as the worlds second largest economy, valued at a staggering £5.8 trillion
(Flanders, 2011). However, the internationalisation of Chinese f‌irms has not been easy.
Foreign acquisitions have exacerbated Western apprehension regarding the shift of
corporate control to the East, particularly given the mainstream identity of the targeted
international Western brands, such as IBM (Private Equity Asia, 2012) and Volvo (China
Business News, 2012). Foreign acquisitions involving the Peoples Republic of China
(PRC) are politically sensitive
, particularly given that many involve purchase targets
within the energy, industrial, or technology sectors growing global demand and
diminishing resources are heightening the implications from these purchases. For
example, the off‌ice of President Obama has openly criticised Chinas trade practices.
Indeed, The New York Times reported that the Obama administration has recommended
that the Committee on Foreign Investment into the US should block any mergers and
acquisitions involving the Chinese companies and American businessesdue to national
security concerns (Schmidt et al.inThe New York Times, 2012).
While Chinese foreign acquisitions have led to a stream of articles in the broader
f‌inancial press (e.g. The Economist and the Financial Times), there have been few
academic studies specif‌ically examining Chinese acquisitions on a national versus
international basis since 2000, with most of this research pertaining to the US (Jensen and
Ruback, 1983; Shleifer and Vishny, 2003) or the EU (Faccio and Masulis, 2005). The
historically insular Chinese economy has in fact only recently become a popular topic of
investigation, despite China having exhibited unique characteristics worthy of academic
investigation for a number of decades. Some of the key characteristics relate to the level of
state involvement and resultant political connectedness in the corporate decisionmaking
process (see Gao and Kling, 2008; Xu et al., 2013; Wu et al., 2012; Zhou et al., 2012).
While many papers focus on Chinas unique political structure and its ramif‌ications upon
traditional f‌irm performance measures, none to our knowledge investigates the f‌inancial
performance of bidders acquiring domestic versus foreign targets.
Most of the literature in this area centres on US and EU data sets examining whether
shareholder value increases when acquiring f‌irms expand their operations abroad. The
premise behind this work lies in whether investors place a premium on international f‌irms
For example, Swedish government off‌icials strongly opposed the sale of Volvo to the
Chinese car manufacturer Geely under the fear of the potential outf‌low of intellectual property
to the East, resulting in the deal being referred to the European Commission on antitrust
© 2013 John Wiley & Sons Ltd
906 Emma L. Black, Angelos J. Doukas, Xiaofei Xing and Jie (Michael) Guo

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