SPRING 2023 NO.74 / THOUGHT LEADERSHIP BRIEF 2 ISSUE Cross-border M&As are a major avenue for MNCs’ international growth and expansion. In comparison with greenfield investments, cross-border M&As allow foreign firms to enter new markets more quickly and efficiently. Recent years have witnessed a significant growth in cross-border M&A activities by emerging MNCs in developed countries. However, the completion rate of such deals is relatively low compared to the completion rate of MNC deals between developed countries. While prior research in finance and strategy largely focuses on firm- and deal-level factors such as management resistance and bid premium in explaining failure of M&A completion, more recent studies have begun to adopt the institutional based view to investigate cross-border M&As. Institutional differences between the home and host country increase the complexity and uncertainty in the renegotiations during the public takeover process (i.e., the “intermediary” phase between the announcement date and the resolution date), resulting in higher likelihood of deal abonnement. In particular, these studies have considered both formal and informal institutional constraints including regulatory disapproval and cultural differences. Despite the insights into the institutional effects on cross-border M&As, the literature remains incomplete in at least two aspects. First, while prior research has documented the effect of informal institutional on deal completion, we still know little about how informal institutions affect the M&A process. As such, the mechanism through which informal institutions lead to deal failure largely remains a black box. Second, the existing literature has focused on the national institutional environment but remained silent on institutional variations and heterogeneities within the same country. ASSESSMENT In this study, we analyze the role of political ideology of host country communities in cross-border M&A completion. Ideology incorporates a set of assumptions, values and beliefs of groups of people that guide their interpretation of the environment. People with different political ideologies along the liberalism-conservatism spectrum demonstrate not only different preferences regarding public policies and social issues, but also different psychological orientations and behavioral patterns. As such, the ideological preference in local communities influences how local stakeholders interpret and react to an acquisition of a local target pursued by a foreign acquirer, as transfer of control of strategic assets and post-acquisition consolidation are both likely to cause perceived uncertainty and threat. Specifically, we analyze M&A deals pursued by Chinese firms in the U.S. and propose that these deals are more prone to abandonment after announcement in conservative communities than in liberal communities. We constructed a dataset of Chinese publicly listed firms’ announced deals in the U.S. from 2000 to 2016. We coded county-level ideology using the popular vote results during the presidential election happening in 2000, 2004, 2008, and 2012. We checked the popular voting results for every county and coded the voting percentage for the Republican candidate for the popular vote (to measure state conservatism). We then used the election results to predict deal completion for the following four years until the next election. For example, for deals taking place in 2001 to 2004, we used the election results from 2000. We find that on average, upon a 1% increase in the republican vote, the completion rate decreases by 0.43%. For example, in 2012’s presidential electoral vote, the Republican President Candidate Romney received 60.57% vote in Arizona and 35.17% vote in Model 1 2 3 4 5 County Conservative Ideology (CCI) -1.269 [0.027] -0.685 [0.055] -8.854 [0.129] 3.573 [0.0828] -1.849 [0.056] CCI x Coverage -0.00433 [0.021] -0.00563 [0.343] CCI x ESS 0.144 [0.085] 0.112 [0.082] CCI x CUR -87.84 [0.0162] -82.02 [0.0190] P-value in parentheses Table 1. Chinese Firms’ Cross-Border Acquisitions of US Firms: Influence of State Conservative Ideology on Acquisitions’ Success
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