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Management International Review
Published in: Management International Review 2/2023

06-02-2023 | Research Article

The Zone of Conformity: A Comparison of Private and State-Controlled Enterprises in M&As

Authors: Sunny Li Sun, Young Jin Ko

Published in: Management International Review | Issue 2/2023

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Abstract

Drawing from the literature on institutional pressure, we argue that firms with different ownership types have different strategic options in domestic and overseas markets, namely the zone of conformity. State-controlled enterprises (SCEs) have a broader range of acceptable actions than do private-controlled enterprises (PCEs) in a domestic market but face more sanctions and stricter conformity requests in an overseas market. The concept of the zone of conformity predicts SCEs have a higher probability of deal failure overseas than in domestic markets and strategically seek less equity ownership of target firms in cross-border deals. The autocracy level of target country moderates the M&A behaviors difference between SCEs and PCEs. Our analysis of 12,497 Chinese mergers and acquisitions supports the study hypotheses.
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Appendix
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Footnotes
1
In our final sample, the total number of SCEs was 2,430, among which 1,222 firms were SOEs. For example, TCL Corp. is a city municipal company whose largest shareholder is Huizhou City Investment Holding Co. TCL was coded as an SCE although it is not an SOE because its shares owned by state was about 10% as of 2017. Although we test the same model using SOE classification, our main effects remain the same.
 
2
Wei L. (2020), China’s Coronavirus Response Toughens State Control and Weakens the Private Market, The Wall Street Journal. March 18. https://​www.​wsj.​com/​articles/​chinas-coronavirus-response-toughens-state-control-and-weakens-the-private-market-11584540534. He L.(2021) China is cracking down on data privacy, CNN, July 7. https://​www.​cnn.​com/​2021/​07/​07/​tech/​china-didi-data-tech-crackdown-intl-hnk/​index.​html .
 
3
Wei, L. and Zhai, K. (2021) Chinese regulators suggested Didi delay its U.S. IPO, Wall Street Journal, July 5. https://​www.​wsj.​com/​articles/​chinese-regulators-suggested-didi-delay-its-u-s-ipo-11625510600.
 
4
China’s state applied anti-monopoly law to constrain PCE’s M&As. Liu C. and Chen S. (2020); China Fines Alibaba, Tencent Unit Under Anti-Monopoly Laws, Bloomberg, Dec. 14. Can Chinese big tech learn to love Big Brother? The Economist, May 7th 2022, https://​www.​economist.​com/​business/​can-chinese-big-tech-learn-to-love-big-brother/​21809084.
 
5
Meyer et al., (2014, p. 220) provide an example: “Stock market regulation may require investors to go public with a formal bid for all outstanding shares when increasing their equity stake beyond certain threshold levels” (e.g., 30% in the Euronext market).
 
6
We included subsidiary firms that were privately held if their ultimate parents were publicly traded. We coded the subsidiary as SCE if its ultimate parent was an SCE. Although we dropped deals by subsidiaries, our results remained the same.
 
7
We first excluded 4,200 transactions with no disclosed deal value. Second, we dropped deals in which the ratio of the transaction value to the bidder’s equity value was less than 5% (Jacobsen, 2014). Third, we excluded deals by foreign-invested acquirers to mitigate the possible confounding effect for them to conform to different institutional legitimacies. Fourth, we eliminated deals for which the SDC did not report equity ownership sought. Finally, we excluded deals with missing values.
 
8
The industries with the high abandonment rates are Business Services and Prepackaged Software, while the low abandonment rates are in Stone, Clay, Glass, and Concrete Products and Transportation and Shipping.
 
9
The National Security Foreign Investment Reform and Strengthened Transparency Act “strengthened the review process, adding foreign-government-controlled transactions as factors for consideration.” See Klein (2018): It’s not just the US: around the world, doors are shutting on Chinese investment. South China Morning Post, September 15.
 
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Metadata
Title
The Zone of Conformity: A Comparison of Private and State-Controlled Enterprises in M&As
Authors
Sunny Li Sun
Young Jin Ko
Publication date
06-02-2023
Publisher
Springer Berlin Heidelberg
Published in
Management International Review / Issue 2/2023
Print ISSN: 0938-8249
Electronic ISSN: 1861-8901
DOI
https://doi.org/10.1007/s11575-023-00501-9

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