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Spatial geography and control in foreign acquisitions

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Abstract

This article examines how spatial geography influences firms’ choice of control in cross-border acquisitions (CBAs). Building our arguments on the information asymmetry in CBAs, we argue that geographic distance affects adverse selection and moral hazard problems in CBAs. Geographic distance hinders acquirers’ efforts to assess the true value of the target firm, prompting them to opt for a partial control. At the same time, geographic distance hampers acquirers’ ability to manage contractual relationships and integrate target firms, prompting them to opt for a full control. We argue that the cost and benefit trade-off of full vs partial ownership varies at different levels of geographic distance. Accordingly, we propose a curvilinear, U-shaped relationship between geographic distance and equity ownership. This relationship is contingent on acquisition relatedness and the listing status of the acquirer (public vs private). As the geographic distance between acquirer and target increases, acquirers assume higher equity stakes in related acquisitions than in unrelated acquisitions. At greater geographic distances, public firms acquire more equity ownership than do private firms. Findings from 10,181 deals across 52 acquiring and 61 target countries provide robust support for these arguments.

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Notes

  1. We thank an anonymous reviewer for suggesting this control.

  2. We thank an anonymous reviewer for recommending spline regressions.

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Acknowledgements

This research was supported by grants from the Social Sciences and Humanities Research Council of Canada (SIG program), Ryerson University, and Rutgers University Research Council. We thank Associate Editors Ram Mudambi and Paul Almeida, and three anonymous reviewers, for their comments on earlier versions of this paper. The authors contributed equally to the development of the manuscript.

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Authors and Affiliations

  1. Department of Global Management Studies, Ted Rogers School of Management, Ryerson University, Toronto, Canada

    Shavin Malhotra

  2. Department of Management and Global Business, Rutgers Business School, Newark, USA

    Ajai S Gaur

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  1. Shavin Malhotra
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  2. Ajai S Gaur
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Accepted by Ram Mudambi and Paul Almeida, Area Editors, 28 July 2013. This paper has been with the authors for three revisions.

Both authors contributed equally to the development of the manuscript.

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Malhotra, S., Gaur, A. Spatial geography and control in foreign acquisitions. J Int Bus Stud 45, 191–210 (2014). https://doi.org/10.1057/jibs.2013.50

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