Country uncertainty, power distance, and payment methods in acquisitions

ABSTRACT

This study examines the impact of country-specific uncertainty on the choice of payment method in international acquisitions. Our results show a negative association between the level of target country-specific uncertainty and cash transactions. Specifically, when the host country experiences a high level of country uncertainty, acquirers are more likely to choose non-cash transactions in which acquiring firms can issue their own equity to the target firm as part or all of the purchase consideration of the deal. The result is robust to alternative tests and analysis of subsamples. We also find that differences in uncertainty between host and home countries are informative of bidders’ payment choices. Further, we find that the negative relation between target country-specific uncertainty and cash payment weakens when there are larger differences in power distance between host and home countries. Our findings provide recommendations for policy-making bodies, and have implications for firm managers making corporate restructuring decisions.

KEYWORDS:

• Country uncertainty
• acquisitions
• payment methods
• institutional environment
• power distance

JEL CLASSIFICATIONS:

• G34
• G32
• G38
• D81

Acknowledgement

The authors wish to thank Chris Adcock (the Editor), the Associate Editor, and three anonymous referees for very helpful comments and suggestions. Also, we would like to thank Ian Hirst, Jo Danbolt, and the participants at the 2019 Financial Markets and Corporate Governance Conference (Australia), the 2019 AsianFA (Vietnam), and seminars at Westminster Business School, and La Trobe Business School, for very fruitful comments and suggestions. We are grateful to the members of the UE-UD Teaching and Research Team in Corporate Finance and Asset pricing (TRT-CFAP) for their helpful comments and suggestions. We also thank the Project titled “Building a shared electronic library for higher education institutions in Vietnam” in promoting collaboration and sharing in research.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 We further select power distance as a culture proxy as it is less endogenous with (influenced by) country-level uncertainty.

2 It should also be highlighted here that a cross-border acquisition will generally not lead to a modification in the target country institutional environment, as legal systems, governmental structures, corporate regulations, taxation policy and the like are determined either constitutionally or through government decision-making.

3 It has long been empirically recognized that real options theory explains the reasons that drive foreign firms to make incremental investments, deferring part of the investment whilst gaining access to the new market (Delios and Henisz 2003; Brouthers and Dikova 2010; Cuypers and Martin 2010). Such access provides a valuable growth option to the acquirer (Kogut 1991; Leiblein 2003; Slangen and Van Tulder 2009; Ahammad et al. 2017). Similarly, Tong, Reuer, and Peng (2008), Cuypers and Martin (2010), and Li and Li (2010) have confirmed that joint venture investment may also constitute a real option by unlocking access for foreign firms to more information about domestic targets which in turn allows for better assessment of the intrinsic value and capability of firms and, thereby, tackle country-specific uncertainties.

4 For instance, country reports for Nigeria, South Africa, the United Kingdom and the United States for the year 2017.

5 The EIU provides country reports regularly for 189 countries, typically covering politics, economic policy, the domestic economy, foreign and trade payments events, and on their overall impact on the country risk. Put differently, the reports from this leading company in the field of country intelligence mainly examine and discuss the main economic, financial, and political trends in a country.

6 To make the WUI equivalent across nations, Ahir, Bloom, and Furceri (2018) scale the raw count by the number of words in each report.

7 In a similar stream of research, Dutta, Saadi, and Zhu (2013) also confirm the information asymmetry problem in cross-border acquisition deals. Accordingly, since there is an increase in geographic and cultural distances, it is more complicated for acquirers to communicate with targets.

8 National culture comprises of a group of values and beliefs jointly shared by members of one country attributed to early socialization in families and school (Hofstede 1980).

9 Maung et al. (2021) document that acquirers from more religious countries pay less and a smaller proportion of their payment is in the form of cash as opposed to stock. Their study suggests that a country’s religiosity can closely proxy the risk aversion of firms’ managers.

10 According to Hirsch (1986), since acquiring firms have legitimate control over acquired firms through ownership control, acquisitions are regularly likened to ‘conquests’, with the acquirer as the ‘conqueror’ and the acquired firm as the ‘conquered’ (Hambrick and Cannella 1993; Pablo 1994).

11 Initially, this paper employed a comprehensive sample of 82 target company countries collected from the SDC Platinum Database. Following a suggestion of an anonymous referee, we have included additional firm-level data and removed deal observations without firm-level financial data. The final sample includes only 58 target company countries, of which 26 are developed and 32 are developing.

12 Source: IMD World Competiveness Center Dataset and Transparency International.

13 See Appendix A.

14 Stock payment method is more likely to be used in M&A deals in related industries (Faccio and Masulis 2005).

15 The acquisition of foreign target firms involves higher information asymmetry, search costs and valuation difficulties (Shimizu et al. 2004), lowering the probability of stock financing (Myers and Majluf 1984; Hansen 1987; Travlos 1987).

16 As the bidder holds a specific proportion of target equity, they can access the inside information of targets, thereby lowering the problem of the asymmetric information. Consequently, cash financing is preferred (Myers and Majluf 1984; Hansen 1987; Travlos 1987).

17 Stock financing has a positive relation with M&A deal size (Faccio and Masulis 2005; Swieringa and Schauten 2007).

18 Capron and Shen (2007) argue that firms whose asset value is highly uncertain, such as high-tech firms, have difficulties in sending a credible signal of their value to bidders, thus potentially affecting the payment method choice.

19 Numerous bodies utilize this indicator for different purposes, for instance, government agencies use it for decisions regarding key policies, companies use it for investment and risk management decisions, and academics use it in curriculum development (Holmes 2014; Dang et al. 2018).

20 See De Haan and Sturm (2000) for a review on this variable.

21 According to the taxation hypothesis, the reason for the tax liability can affect payment method choice (Eckbo and Langohr 1989).

22 In a previous version of the paper we also controlled for an overall country-level government quality (GOVQLT) index proxy, however, this was removed from the analysis in the current version due to correlation concerns as identified by a reviewer. Note that our primary hypothesis findings were unchanged with controlling for this GOVQLT variable.

23 US$ is the currency in the study.

24 We re-estimate Equation (1) using a Tobit approach. After controlling for deal-specific, firm-level, and country-level variables, our findings remain qualitatively unchanged.

25 We thank the reviewer for this suggestion.

26 We thank the reviewer for this suggestion.

27 Sha, Kang, and Wang (2020) find that Chinese acquiring firms are less likely to use only cash for their acquisitions during periods of high economic policy uncertainty.

Additional information

Funding

This research is funded by Vietnam National Foundation for Science and Technology Development (NAFOSTED) under grant number 502.02-2019.315.

Notes on contributors

Man Dang

Associate Professor Man Dang joined The University of Danang, University of Economics in April 2007. He received his MBA in Corporate Finance from The University of Stirling (UK) and PhD in Finance from La Trobe University (Australia). Dang has published research papers in quality finance journals, including International Review of Financial Analysis, European Journal of Finance, Finance Research Letters, Pacific-Basin Finance Journal, Quarterly Review of Economics and Finance, Journal of Multinational Financial Management, Emerging Markets Finance and Trade, and Australian Journal of Management.

Viet Anh Hoang

Dr. Viet Anh Hoang worked at The University of Danang, University of Economics from 2007. Hoang has published research papers in quality finance journals, including European Journal of Finance, Journal of Multinational Financial Management, and Emerging Markets Finance and Trade.

Edward Jones

Associate Professor Edward Jones joined the School as Senior Lecturer in Finance on 1st December 2009 having previously been Lecturer in Financial Economics at the University of Edinburgh. Dr Jones obtained his PhD at Heriot-Watt University, Edinburgh and has also worked as a Lecturer in Finance at the University of Wales, Swansea. He has authored a number of papers on profit measurement, corporate governance, corporate growth opportunities and company investment decisions, including British Accounting Review, European Accounting Review, International Review of Financial Analysis, European Financial Management, European Journal of Finance, Accounting and Business Research, and International Journal of Finance and Economics.

Darren Henry

Professor Darren Henry joined the Department of Accounting and Management at La Trobe University as a Lecturer in February 1997. He transferred to the Department of Economics and Finance in January 2000, and was promoted to Senior Lecturer in 2005, Associate Professor in 2007 and Professor in 2019. Darren has published research papers in quality finance journals, including Journal of Financial Markets, Journal of Banking and Finance, European Journal of Finance, Pacific-Basin Finance Journal, Accounting and Finance, Journal of Multinational Financial Management, Accounting and Business Research, Emerging Markets Finance and Trade, and Australian Journal of Management.

Premkanth Puwanenthiren

Dr. Prem Puwanenthiren joined The University of Westminster (UK) from 2018. He received his PhD in Finance from La Trobe University (Australia). Prem has published research papers in quality finance journals, including International Review of Financial Analysis, European Journal of Finance, Accounting and Finance, Quarterly Review of Economics and Finance, and Australian Journal of Management.