Interorganizational imitation and payment mode decisions in cross‐border acquisitions

• Author: Ankita Chhabra,Manish Popli
• Published date: 01 January 2018
• Date: 01 January 2018
• DOI: http://doi.org/10.1002/jsc.2179

RESEARCH ARTICLE

DOI: 10.1002/jsc.2179

Strategic Change. 2018;27(1):43–51. wileyonlinelibrary.com/journal/jsc © 2018 John Wiley & Sons, Ltd. 43

Abstract

Acquiring rm imitates the payment method decisions made by prior foreign acquirers target‐

ing the same host country in cross‐border acquisions. Informaon asymmetry and bounded

raonality induces acquirers to imitate the decisions of other foreign rms in the similar context.

Mimec behavior of the rms is more salient when the acquiring rm belongs to a country with

high uncertainty avoidance cultural aribute and when instuonal uncertainty is high in host

country. The hypotheses are tested using binary logisc regression on a dataset of 1,136 cross‐

border acquisions done by a group of seven countries during 2000–2010.

1 

|

 INTRODUCTION

A rich body of literature in the nance and strategy domain has exam‐

ined the determinants of payment method in an M&A deal (Linn and

Switzer, 2001; Reuer, Shenkar, & Ragozzino, 2004). Postselecon of

target rm, various elements of contract design such as equity stake,

payment mode, etc. need to be decided with the consent of both

acquirer and target rms. Mode of payment is an important deci‐

sion of deal structuring as it not only aects the wealth gain for both

acquirer and target rms (Barbopoulos & Sudarsanam, 2012), but it

also impacts the capital structure of the acquiring rm (Biao, 2014).

Issues arising out of informaon asymmetry leads to diculty in

valuaon of target rms and it might lead to adverse selecon, that is,

selecon of target whose real value is less than what it appears to be

(Akerlof, 1970). Such issues get accentuated in cross‐border acquisi‐

ons (CBAs) and to migate these concerns, acquirers use stock and

other conngent payment mode mechanism such as earn outs, to

share the valuaon risk with the target rm (Reuer et al., 2004). In this

arcle, we submit that when faced with high risks due to lack of infor‐

maon about the true value of target rm’s assets, acquirers could

be substanally inuenced by other rms’ acons and hence they

might imitate the deal structuring decisions of prior foreign acquir‐

ers (Dimaggio & Powell, 1983; Lieberman & Asaba, 2006). Bounded

raonality and informaon asymmetry might induce an acquirer rm

to imitate the decisions made by other foreign rms in the similar

context (Haunschild & Miner, 1997; March & Simon, 1958). Prior lit‐

erature has used two dierent theorecal lenses to view this phenom‐

enon of informaon asymmetry: sociology based informaon theory

and compeve rivalry theory (Lieberman & Asaba, 2006). Here, we

ground our asserons on sociology based informaon theory which

suggest that in situaons of uncertainty, managers oen try to imitate

the decisions of other rms to gain legimacy and remain compe‐

ve (Huang, Chou, & Lee, 2010). Recent literature provides empirical

support that cross‐border acquirers imitate the premia and ownership

decisions made by other foreign acquirers in the same market (Mal‐

hotra & Zhu, 2013; Malhotra, Morgan, & Zhu, 2016). Building on this

literature, we posit that interorganizaonal imitaon would impact

payment mode decisions of managers in a cross‐border M&A deal.

In addion to this, we aempt to theorize the role of contex‐

tual variables which could potenally impact the imitaon of pay‐

ment mode. To that end, we try to explicate the impact of formal and

informal instuon on the imitaon of payment mode decisions by

acquirer. First, we wish to explore the impact of cultural aributes of

the acquirer on its payment mode decisions. In parcular, we focus

on the extent of uncertainty avoidance (UA) of the acquirer rm. As

described in the seminal work by Hofstede (1991), culture impacts

the way managers deal with uncertainty and hence aects their deci‐

sions. In internaonal business literature, UA is one of the most com‐

monly used cultural aribute (Rapp, Bernardi, & Bosco, 2011). CEOs

from high uncertainty avoiding countries are less risk tolerant, and

hence reluctant to go for cross‐border acquisions as they seek higher

returns for these deals (Frijns, Gilbert, Lehnert, & Tourani‐Rad, 2013).

We believe that it is pernent to theorize and invesgate the mod‐

erang impact of UA on imitaon of the payment mode choices of

acquiring rm. Addionally, we also wish to explore the impact of host

country instuonal uncertainty on its payment mode decisions. We

Interorganizaonal imitaon and payment mode

decisions in cross‐border acquisions

Ankita Chhabra | Manish Popli

Indian Instute of Management, Prabandh

Shikhar, Rau Pithampur Road, Indore, MP

453556, India

Correspondence

Manish Popli, Indian Instute of

Management, Prabandh Shikhar, Rau

Pithampur Road, Indore, MP 453556, India.

Email: manishp@iimidr.ac.in