Abandonment of cross-border acquisitions: The role of target country context

Abstract

Drawing primarily upon institutional theory, we examine the impact of the target country context on the abandonment of cross-border acquisitions (CBAs). We focus on four inter-related but distinct dimensions of target country context – the quality of formal institutions reflected in the regulatory ease of doing business, the quality of informal institutions assessed as the level of corruption, the city location of the acquisition target (i.e. whether the acquisition target is located in a global city vs. elsewhere), and the overall level of country economic development (i.e., advanced vs. emerging). Based on this framework, we argue that while business-friendly formal institutions in the target country generally reduce the likelihood of CBA abandonment, the quality of informal institutions has a non-linear effect on CBA abandonment, and the location of the acquisition target in a global city reduces the likelihood of CBA abandonment. We also posit that these relationships are moderated by the target country's level of economic development. We test these predictions using a large sample of 1,459 CBAs in 70 target countries and find empirical support for most of our hypotheses.