Spatial geography and control in foreign acquisitions

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 hi...

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Bibliographic Details
Published in:Journal of international business studies 2014-02, Vol.45 (2), p.191-210
Main Authors: Malhotra, Shavin, Gaur, Ajai S
Format: Article
Language:English
Subjects:
Acquisitions
Acquisitions & mergers
Adverse selection
Asymmetry
Business and Management
Business risks
Business Strategy/Leadership
Business structures
Costs
Countries
Decision making
Economic activity
Foreign investment
Foreign subsidiaries
Geography
Gross domestic product
Host country
Influence
Information asymmetry
International Business
Investment policy
Literature
Management
Moral hazard
Multinational corporations
Organization
Ownership
Spatial analysis
Studies
Target acquisitions
Trade-off
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Summary: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.
ISSN:0047-2506
1478-6990
DOI:10.1057/jibs.2013.50