Trade Networks and Cross‐Border Acquisitions: Evidence from United States Acquiring Firms

• Published date: 01 December 2016
• Date: 01 December 2016
• Author: Seung Hun Han,Eun Jin Jo,Duk Hee Lee,Dong‐Kyoon Kim
• DOI: http://doi.org/10.1111/ajfs.12158

Trade Networks and Cross-Border

Acquisitions: Evidence from United States

Acquiring Firms*

Seung Hun Han

School of Business and Technology Management, College of Business, Korea Advanced Institute of Science

and Technology

Eun Jin Jo

School of Business and Technology Management, College of Business, Korea Advanced Institute of Science

and Technology

Dong-Kyoon Kim

Department of Economics, Finance & Real Estate, School of Business, Montclair State University

Duk Hee Lee**

School of Business and Technology Management, College of Business, Korea Advanced Institute of Science

and Technology

Received 22 February 2016; Accepted 7 October 2016

Abstract

This study examines the impact of the trade networks of target firms’ nation on the

announcement returns of the cross-border acquisitions of United States acquirers. By using a

sample of 818 cross-border acquisitions during 2000–2007, we find that the centrality mea-

sure of trade networks has a positive impact on announcement returns, after controlling for

Hofstede’s cultural distance measure between the acquiring and target nations and various

firm- and deal-specific factors. In sum, trade network analysis, based on strength centrality,

better explains the performance of acquiring firms than does the bilateral trade openness

measurement used in previous studies.

Keywords Centrality; Cross-border mergers and acquisitions; Cultural distance; Network

analysis; World trade network

JEL Classification: G15, G34

*This work was supported by the National Research Foundation of Korea Grant funded by

the Korean Government (2014S1A3A2044459).

**Corresponding author: Duk Hee Lee, School of Business and Technology Management,

College of Business, Korea Advanced Institute of Science and Technology, 373-1 Gwahangno,

Yuseong-gu, Daejeon, 305-701, South Korea. Tel: +82-42-350-6306, Fax: +82-42-350-6339,

e-mail: dhlnexys@kaist.ac.kr.

Asia-Pacific Journal of Financial Studies (2016) 45, 916–943 doi:10.1111/ajfs.12158

916 ©2016 Korean Securities Association

1 Introduction

The world economy has liberalized through deregulation in recent decades. Thus,

global financial and product markets have become globalized and open to other

countries (Helleiner, 1995), resulting in their greater integration. The globalization

of the world market has led both real and financial economies (i.e. trade and finan-

cial transactions, respectively) to become integrated (Vo and Daly, 2007). Accord-

ingly, cross-border mergers and acquisitions (M&As) have increased significantly in

terms of volume and frequency (Martynova and Renneboog, 2008). However,

although global markets are integrated and cross-border acquisitions are prevalent

in these markets, variations still exist between the target and acquiring nations in

terms of both country-specific (i.e. culture, religion, language) and deal-specific (i.e.

payment methods) factors (Morosini et al., 1998; Rossi and Volpin, 2004; Chakra-

barti et al., 2008; Aybar and Ficici, 2009; Ahern et al., 2015). Therefore, it is mean-

ingful to investigate the determinants that may affect the stock market evaluation of

cross-border merger decisions.

Previous cross-border merger studies have focused on the bilateral relationship

between the target and acquiring nations, analyzing, for example, trade openness

and cultural distance as the major determinants of the volume and performance of

those mergers. However, as global markets have become increasingly integrated,

trade openness needs to be measured more comprehensively and new dimensions

of cultural distance

1

are required to analyze how they affect the performance of

cross-border mergers. Thus, in this study, by using network analysis, we measure

the national trade connectivity of the target nations to other countries and examine

its impact on the performance of the cross-border acquisitions of United States

firms, after controlling for the various dimensions of cultural distance as well as

both deal- and firm-specific factors.

In the rising international trade literature, the application of network analysis

has played an important role, in both theoretical and empirical approaches. In par-

ticular, the cross-border merger literature measures the openness of a country by

using international trade volume (Chakrabarti et al., 2008) and gravity models (Di

Giovanni, 2005; Ahern et al., 2015) as the crucial determinants of the performance

of cross-border mergers. However, the traditional, bilateral trade volume variable

only considers total trade volume with various countries or the trade connectivity

between the target and acquirer, with the trade relations of other individual coun-

tries held constant, while gravity models typically consider the physical distance of

the target and acquiring nations (Chakrabarti et al., 2008; Erel et al., 2012). In

other words, only the interdependences between two nations are measured. There-

fore, to measure all possible trading interactions (or connectivities) for the target

1

Stulz and Williamson (2003) argue that national culture explains the variations in the share-

holder protection of the local economy better than does a country’s trade openness.

Trade Networks and Cross-Border Acquisitions

©2016 Korean Securities Association 917