European Union Enlargement Announcement and Corporate Valuations

ABSTRACT

This study explores the effects of the European Union accession announcement on the valuations of companies in the prospective member states. I examine firm level data from ten countries which joined the EU in May 2004. My analysis reveals that the announcement of these countries’ future EU membership in November 2001 significantly increased the Tobin’s Q ratios of their publicly traded firms several years before formal membership was granted. This increase in firm value can likely be attributed to a reduced cost of capital and/or an expected increase in growth opportunities and cash flows, resulting from the announcement of their countries’ inclusion in the EU.

KEY WORDS:

• CEEC
• cost of capital
• EU enlargement
• valuation

Acknowledgments

This article has benefited from helpful comments and suggestions of Jay Dahya, Armen Hovakimian, Ted Joyce, Kishore Tandon, the three anonymous referees, seminar participants at Baruch College, 2012 Multinational Finance Conference in Krakow, Poland, 2014 Eastern Finance Conference in Pittsburgh, Pennsylvania, and 2014 Southwestern Finance Conference in Dallas, Texas.

Notes

1. Central and Eastern European Countries (CEECs) is an OECD term for the group of countries comprising Albania, Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania, the Slovak Republic, Slovenia, and the three Baltic States Estonia, Latvia, and Lithuania.

2. The acquis communautaire is the body of common rights and obligations that is binding on all the EU member states. The candidate countries have to accept the acquis and agree on the timing of their implementation before they can join the EU (http://ec.europa.eu)

3. In 2007, Bulgaria and Romania joined the European Union (EU). Croatia joined the EU on July 1, 2013, bringing the total number of member states to 28.

4. European Community or European Communities originally comprised the European Economic Community, the European Coal and Steel Community (dissolved in 2002), and the European Atomic Energy Community (Euratom). In 1993, the three communities were subsumed under the EU (Source: www.britannica.com).

5. Czechoslovakia split into Czech Republic and Slovak Republic on January 1, 1993.

6. The negotiations between the EU and the 10 accession countries concluded in December 2002 at the Copenhagen European Council, and the EU Parliament gave the affirmative vote on April 14, 2003.

7. While a majority of companies have a fiscal year that coincides with the calendar year, some of the firms may end their fiscal year on a date other than December 31. Worldscope database assigns financial data in the year in which the company’s fiscal year ended, with the special rule for the companies whose fiscal year ended within the short period after the calendar year end, for these companies the cutoff date is January 15 (Worldscope Database Datatype Definitions Guide, 2007).