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The Role of Corporate Governance for
Acquisitions by the Emerging Market
Multinationals: Evidence from India
Burcin Col and Kaustav Sen
Pace University, New York
CGEM Conference, HHL Leipzig, September 2015
The research question
• The documented reasons why firms emerging market (EM) firms acquire developed market (DM) targets
• Improve R&D capabilities (Hege, Jaslowitzer and Rapp, 2014)
• Internationalize acquirer’s tangible and intangible resources and exploit the complementary nature of the two firms (Gubbi, Aulakh, Ray, Sarkar and Chittor, 2010)
• Restructuring operations of the target (Chen, 2011 and Chari, Chen and Dominguez, 2012)
• Can it also be because EM acquirers want to bond with the institutional practices of DMs (Coffee, 1999)?
India Goes Global…
• Accenture report titled as “India Goes Global: How Cross-border
Acquisitions are Powering Growth”, pg. 16
• “Where possible, Indian companies should treat the governance standards of
companies they are acquiring as an additional asset. For example, the well-reported
Mittal-Arcelor deal was carefully constructed to allow the new company to benefit
from Arcelor’s highly evolved corporate governance and operating structures.”
What we do in this paper
• We examine whether emerging market (EM) firms, in particular Indian firms,
acquiring targets located in developed markets (DM) implement corporate
governance changes that indicate adapting the target country practices.
• We conduct two sets of tests
• Compare the CG changes of the DM acquirers with a control sample of domestic
acquirers
• Examine whether country level indicators explain the cross-sectional variation in
the CG changes implemented by the DM acquirers
• We also examine the effect of implementing the CG changes on firm valuation.
Main results
Using Indian firm-level data between 2001-2010:
• Ownership and board characteristics change significantly after EM-DM
acquisitions
• CG change is more pronounced for DMs with better country-level investor
protection
• Higher valuation associated with the changes in CG
Contribution
• We extend the literature on corporate governance effects of cross-border
M&As by focusing on specific issues
• We restrict to EM acquirers and DM targets since the institutional
framework is starkly different between the two settings, and any CG changes
observed due to the transaction is most likely due to these differences and
not any other reason
• Our study is one of the very few that examines the effects at the firm level;
most of the prior studies are at the country level (see Bris and Cabolis(2008),
Martynova and Reneboog (2008), Col and Errunza (2015))
• We examine the role of EM regulation in CG changes by DM acquirers
Spillover and Bootstrapping
• Martynova and Renneboog (2008) proposes two alternative hypotheses
regarding CG in cross border M&As
• Spillover, where the acquirers CG practices are adapted by the target. It can
be positive, where better governed acquirers improve the practices of the
target, or it can be negative, where the bad practices of the acquirer affects
the target negatively. Chari, Oimet and Tesar (2011) find DM acquirers of
EM targets and add value to the acquirers through positive announcement
returns i.e. positive spillover.
• Bootstrapping, where the acquirer adapts to the target’s practices
We hypothesize bootstrapping …
• We argue that in the specific “EM acquirer – DM target” setting,
bootstrapping will hold because the benefits from such acquisitions will not
accrue unless the target nation’s CG practices are adapted.
• The literature identifies the following benefits
• development of organizational capabilities and learning (Bartlett and Ghoshal,
1989; Hitt, Hoskisson, and Kim, 1997)
• as well as to benefit from partnering with firms from institutionally different
environments by providing access to complementary resources (Gubbi et al. 2010)
• reduce risk (Kim, Hwang and Burgers, 1993)
• improve deficiencies across nationally bounded interfirm networks (Burt, 1992).
Hypotheses
• H1: In order to realize benefits from acquiring developed market targets, emerging market firms bootstrap their corporate governance practices to comply with target country norms.
• H2: Indian firms that acquire developed market targets with better investor protection and legal environment are more likely to adjust firm-level governance.
• H3: Firm valuation is higher for those that adjust firm-level governance after acquiring the developed market targets.
Data source
• M&A data SDC Thompson’s International M&A database for January
2001 and December 2010: 595 completed acquisitions.
• Control sample consists of acquisitions by Indian companies that target
firms in India for the same period: 2,193 such acquisitions.
• Data for the acquiring companies from Prowess, distributed by Center
for Monitoring the Indian Economy (CMIE).
Tables 1 and 2: Sample and Descriptives
Target Nation N %
Australia 7 3.02 %
Belgium 2 0.86 %
Canada 7 3.02 %
Denmark 1 0.43 %
Finland 5 2.16 %
France 7 3.02 %
Germany 22 9.48 %
Italy 6 2.59 %
Japan 2 0.86 %
Netherlands 7 3.02 %
Spain 7 3.02 %
Sweden 2 0.86 %
Switzerland 4 1.72 %
United Kingdom 42 18.10 %
United States 111 47.84 %
Total 232 100%
Frequency DM India Total
2001 1 6 7
2002 9 19 28
2003 14 14 28
2004 15 22 37
2005 28 61 89
2006 39 58 97
2007 52 65 117
2008 20 76 96
2009 14 54 68
Total 192 375 567
Table 3 - Descriptive Statistics
Category Variable Mean Median t value Std Dev N
Treatment Sample (Target Country = DM)
Valuation Tobin's Q (Ind-adjusted) 0.264 0.084 1.1 3.235 192
Ownership FII ownership 12.383 9.310 14.4 11.925 192
Institutional ownership 21.231 20.025 19.9 14.821 192
Promoter ownership 45.953 44.045 35.0 18.213 192
Board Characteristics Board independence 0.607 0.606 55.8 0.128 138
Board busyness 4.086 4.000 14.7 3.271 139
Board diligence 0.786 0.796 66.1 0.109 84
Control Sample (Target Country = India)
Valuation Tobin's Q (Ind-adjusted) -0.017 -0.243 -0.2 1.489 375
Ownership FII ownership 8.062 3.700 14.9 10.410 372
Institutional ownership 15.521 11.290 19.4 15.439 372
Promoter ownership 50.531 52.500 49.5 19.686 372
Board Characteristics Board independence 0.625 0.625 73.6 0.138 264
Board busyness 3.773 3.000 18.7 3.278 264
Board diligence 0.753 0.750 77.6 0.125 166
Methodology
• By subtracting the attribute values of each firm before the acquisition from the
corresponding values after the acquisition, we allow for each firm to be its own
control (Cook and Campbell 1979, p103). The models we use are
1. Change in corporate governance = f (DM, control variables, DM*control variables)
2. Change in corporate governance = f (IED, control variables, IED*control variables)
3. Change in valuation = f (DM, CG, CG*DM, control variables, DM*control
variables, CG*control variables)
Table 4 – Change in corporate governance and valuation after acquisition
CategoryVariable
(post-pre)DM India DM -India t
Kruskal-
Wallis
N
(DM)
N
(India)
Valuation Tobin's Q (Ind-adjusted) -0.375 -0.320 -0.056 -0.4 2.254 184 356
Ownership FII ownership 2.619 1.675 0.944 1.3 3.713* 187 356
Institutional ownership 3.279 1.690 1.589 1.8* 5.419** 187 356
Promoter ownership -2.883 0.058 -2.940 -3.4*** 9.150*** 187 356
Board
Characteristics
Board independence 0.035 -0.003 0.038 2.6*** 8.761*** 114 204
Board busyness -1.386 -0.848 -0.538 -2.3** 9.373*** 114 204
Board Diligence 0.015 0.010 0.005 0.2 0.051 36 112
Table 5 - Change in Corporate Governance : Institutional and Insider Ownership
Dependent Variable Institutional
Ownership
FII Ownership Promoter
Ownership
DM 18.123 ***
(3.53)
10.026*
(1.81)
-17.258*
(-1.78)
SIZE 0.912***
(3.37)
0.308*
(2.01)
MTB 0.928***
(16.14)
0.814***
(17.93)
ROE 0.233
(0.42)
0.794**
(2.34)
ADRGDR 2.639
(1.47)
SALES -2.824***
(-7.20)
SQ_SALES 0.176***
(6.41)
K/S -0.863***
(-16.12)
Y/S 0.525***
(19.07)
I/K -0.024
(-1.07)
SIGMA 0.104
(1.51)
Dependent Variable Institutional
Ownership
FII Ownership Promoter
Ownership
SIZE *DM -1.927***
(-3.15)
-1.143
(-1.63)
MTB*DM -0.626
(-1.61)
-0.596**
(-2.44)
ROE*DM 4.747
(1.30)
5.181
(1.06)
ADRGDR*DM -1.772
(-0.25)
SALES*DM 2.197
(0.88)
SQ_SALES*DM -0.064
(-0.39)
K/S*DM 1.224***
(3.61)
Y/S*DM -0.507
(-1.43)
I/K*DM 0.079***
(3.24)
SIGMA*DM 0.663
(1.12)
Industry FE Yes Yes Yes
N 261 261 392
Adj R-squared 0.0579 0.1090 0.1153
Table 6- Change in Corporate Governance- Board Characteristics
Dependent Variable Board
Independence
Board
Busyness
Board
Diligence
SIZE *DM -0.013***
(-4.01)
0.154*
(1.97)
-0.053***
(-5.24)
Q*DM 0.028*
(2.11)
-0.087
(-1.12)
-0.025***
(-2.92)
ROA*DM 0.039
(0.27)
-0.522
(-0.17)
0.401***
(3.36)
CONC*DM -0.251**
(-2.18)
FCF*DM -3.242**
(-2.76)
AGE*DM -0.001
(-1.61)
LEV*DM 0.066
(1.17)
INSTOWN*DM 0.050***
(4.22)
0.001
(0.87)
BIGFOUR*DM -1.428***
(-4.92)
0.094***
(4.41)
ADRGDR*DM 0.831
(1.33)
0.212***
(9.17)
Industry FE Yes Yes Yes
N 295 328 164
Adj R-squared 0.0666 0.0702 0.1536
Dependent Variable Board
Independence
Board
Busyness
Board
Diligence
DM 0.147***
(3.83)
-2.127***
(-4.29)
0.422***
(4.63)
SIZE 0.001
(0.17)
-0.077
(-1.69)
-0.008***
(-6.87)
Q 0.001
(0.65)
-0.268
(-12.04)
0.013
(22.41)
ROA -0.048*
(-1.98)
3.161***
(3.90)
-0.226***
(-4.03)
CONC 0.284***
(19.19)
FCF 0.329*
(2.01)
AGE 0.000
(0.82)
LEV -0.069**
(-2.96)
INSTOWN -0.027***
(-11.37)
0.001***
(8.17)
BIGFOUR 0.706***
(13.18)
-0.001
(-0.17)
ADRGDR -0.784***
(-10.64)
-0.114***
(-36.71)
Table 7: Change in Corporate Governance (Ownership) and Country-level Regulations
Dependent Variable Institutional
Ownership
Institutional
Ownership
FII
Ownership
FII
Ownership
Promoter
Ownership
Promoter
Ownership
Shareholder_prot 4.858
(1.30)
23.505*
(1.82)
-21.630**
(-2.82)
Creditor_prot 12.467***
(3.07)
8.298*
(2.04)
-7.204***
(-5.34)
SIZE -0.5304***
(-4.56)
-0.649***
(-3.23)
-0.434**
(-2.29)
-2.014
(-0.87)
MTB 0.534***
(12.24)
0.411**
(2.35)
0.269***
(6.27)
-0.745
(-1.33)
ROE -7.821
(-1.33)
-4.173
(-0.53)
-0.291
(-0.09)
18.274*
(1.80)
ADRGDR -1.618
(-0.27)
6.906
(1.49)
SALES -5.263***
(-3.48)
-2.7604
(-1.37)
SQ_SALES 0.293**
(2.95)
0.133
(1.05)
K/S -2.193***
(-4.28)
-0.203
(-1.73)
Y/S 0.382
(1.61)
0.089
(0.54)
SIGMA -1.030***
(-5.74)
-1.336**
(-2.73)
Control variables (interactions) Yes Yes Yes Yes Yes Yes
Industry FE Yes Yes Yes Yes Yes Yes
N 185 185 185 185 185 185
Adj R-squared 0.0249 0.0207 0.0124 0.0248 0.0308 0.0433
Table 8: Change in Corporate Governance (Board Characteristics) and Country-level Regulations
Dependent Variable Board
Independence
Board
Independence
Board
Busyness
Board
Busyness
Board
Diligence
Board
Diligence
Shareholder_prot 2.175***
(5.52)
-1.666***
(-6.24)
0.042*
(1.98)
Creditor_prot -0.096
(-0.42)
-0.605***
(-3.85)
0.957
(0.59)
SIZE -0.027**
(-2.28)
-0.179***
(-4.18)
0.249**
(2.43)
0.965
(0.55)
-0.051***
(-5.21)
-0.054***
(-5.08)
Q 0.025***
(3.41)
0.087***
(5.44)
-0.362***
(-4.22)
-0.345*
(-1.79)
-0.008
(-1.15)
-0.009
(-1.12)
ROA -0.475***
(-3.63)
-0.140
(-1.35)
3.061**
(2.62)
5.446
(0.35)
-0.154
(-1.08)
-0.133
(-0.92)
CONC -2.124
(-0.58)
2.391
(0.87)
FCF -2.015
(-1.60)
-0.343
(-0.14)
AGE -0.001
(-0.30)
0.080**
(2.47)
LEV -0.089
(-1.40)
INSTOWN 0.025*
(2.01)
0.002
(0.03)
0.002
(1.81)
0.002*
(2.13)
BIGFOUR -0.901**
(-2.51)
-0.258
(-0.69)
0.090**
(2.86)
0.091**
(2.95)
ADRGDR 0.377**
(2.39)
-0.172
(0.07)
0.030
(0.88)
0.010
(0.35)
Control variables(interactions) Yes Yes Yes Yes Yes Yes
Industry FE Yes Yes Yes Yes No No
N 102 102 119 119 45 45
Adj R-squared 0.1446 0.0556 0.0888 0.0748 0.1005 0.1002
Tables 9 and 10: Tobin’s Q and Corporate Governance
Governance Variable Institutional Ownership Institutional OwnershipFII FII Promoter Promoter
Ownership Ownership Ownership Ownership
DM2.484** 2.357* 2.426** 1.651* 2.346* 1.770*
-2.3 -2.1 -2.18 -2 -2.06 -2.05
Q (t-1)0.675*** 0.681*** 0.662*** 0.652*** 0.674*** 0.653***
-10.66 -10.91 -13.6 -14.29 -12.06 -15.26
GOV0.01 0.005** -0.001**
-0.01 -2.48 (-2.30)
GOV*DM0.03 0.042 0.006
-1.73 -1.71 -0.7
GOV_DIFF0.0103 -0.037 -0.024
-0.19 (-0.86) (-0.62)
GOV_DIFF*DM0.317*** 0.026*** -0.537*
-7.17 -6.66 (-2.11)
N 491 491 491 491 491 491
Adj R-squared 0.3469 0.3519 0.3493 0.3444 0.3473 0.3435
Governance Variable Board Independence Board IndependenceBoard Board Board Board
Busyness Busyness Diligence Diligence
DM2.545* 1.463* 0.895 1.452* 0.68 0.962
-1.94 -1.96 -0.87 -1.78 -0.13 -1.3
Q (t-1)0.532*** 0.655*** 0.855*** 0.632*** -0.257 0.624***
-7.53 -17.68 -3.93 -16.61 (-0.20) -23.77
GOV0.418 0.027 -10.88
-0.82 -1.16 (-1.49)
GOV*DM-5.852 -0.098 -9.444
(-1.28) (-1.14) (-1.84)
GOV_DIFF0.05 0.033 0.292***
-0.23 -1.49 -16.82
GOV_DIFF*DM0.038** 0.517 2.871***
-2.18 -0.88 -3.26
N 292 292 292 292 153 153
Adj R-squared 0.2359 0.3387 0.2547 0.3433 0.2286 0.4053
Table 11: Changes in Ownership before and after Clause 49
MEAN MEDIAN
Before 2005 After 2005 (p-value) Before 2005 After 2005 (p-value)
Institutional
Ownership
3.575***
(24)
1.141*
(114)
(0.0910) 1.945*
(24)
0.190
(114)
(0.1925)
Foreign
Institutional
Ownership
4.472***
(24)
1.674**
(114)
(0.0569) 3.940***
(24)
0.245*
(114)
(0.0091)
Promoter
Ownership
-1.409**
(24)
-0.285
(114)
(0.2126) -0.085
(24)
-0.055
(114)
(0.8157)
Conclusion
• We conduct a tightly focused study to examine whether the
bootstrapping hypothesis is valid when the acquirer is a EM firm and
the target is a DM firm. Our results confirm this hypothesis.
• We also find that the positive valuation effects are due to the CG
changes adapted after the acquisition.
• Corporate governance regulation implemented in India Clause 49
reduces the bootstrapping effect.
Thank you!
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