The Long-Term Success of Cross-Border Mergers and Acquisitions

Although there has been an exponential increase in the number and size of cross-border mergers during the past decade, there is little research that examines whether such deals are value-enhancing activities for shareholders of successful bidders. We investigate long-term abnormal returns to 361 successful U.S. bidders for foreign targets between 1985 and 1995. Employing a procedure recommended by Lyon et al. (1999) in order to minimize bias in calculating such returns, we find that abnormal returns are significantly negative over both a three- and a five-year window for successful bidders in cross-border mergers. We then divide the firms based upon categorizations employed by Ali and Hwang (2000), who examine country-specific factors related to the value relevance of accounting data. We hypothesize that factors which make accounting data less value-relevant (e.g., the level of alignment of financial and tax accounting) also will make it more difficult for bidding firms to price targets accurately in these countries. If this is true, bidder firms acquiring targets in these countries should realize larger negative abnormal returns. However, we find that negative abnormal returns are smaller in such countries. This may be due to a higher cost of capital for firms in these countries, resulting in a built-in discount to bidders.