Content area
Full Text
Introduction
Literature on cross-border acquisitions presents two schools of thought regarding value creation for the target company's shareholders around the announcement of these acquisitions. One school of thought is based on the industrial organization theory that relates value creation in cross-border acquisitions to various market imperfections namely, financial/capital, labor, and product market imperfections. This school of thought suggests that the target company's shareholders are able to enjoy significantly higher abnormal returns on the announcement of a cross-border acquisition as compared to a domestic acquisition. The reason being is that cross-border acquisitions are used as a means to overcome various market imperfections across the national boundaries by multinational corporations/enterprises (MNCs/MNEs) which in turn help these enterprises in maximizing the wealth of their shareholders. While, the second school of thought states that the value creation for target company's shareholders does not depend upon the nationality of the acquirer per se , the announcement gains are influenced by different bid-specific factors like hostility, mode of payment, relatedness, competition among bidders, size of the target, etc.
Theoretical considerations
This section presents a review of industrial organization theory juxtaposed to bid-specific factors theory as drivers of target's value creation in domestic and cross-border acquisitions. First, the hypotheses as propounded by the proponents of industrial organization theory have been discussed to explain how MNCs take advantage of the market distortions to earn monopoly rent in cross-border acquisitions that in turn enable these companies to generate higher wealth gains for the target's shareholders in these acquisitions as compared to the domestic ones. Subsequently, the bid-specific factors theory has been discussed to elaborate the role of various bid-related characteristics in influencing the target's announcement wealth gains.
Industrial organisation theory as the driver of target's value creation
An explanation of various hypotheses supporting industrial organization theory as the driver of the target's value creation is detailed as follows.
International diversification hypothesis
This hypothesis states that the main motive of MNCs for expanding their operations in different countries is to take advantage of imperfections in the financial markets ([34] Kindleberger, 1969; [33] Hymer, 1976). When financial markets are not properly integrated across boundaries, the rate of return on securities, for a given level of risk, is not similar in different financial markets. Hence, it...