Cross-border acquisitions and financial leverage of UK acquirers

Abstract

Based on a sample of 782 acquisitions by UK firms during 1982–2009, this paper examines the impact of cross-border acquisitions on financial leverage. The paper shows that cross-border acquisitions have a negative impact on the financial leverage of acquiring firms. However, the negative impact of cross-border acquisitions disappears when acquirers choose targets from developed countries, and also when the acquisitions are undertaken by multinational firms. Collectively, the findings imply that exposure to foreign markets reduces the borrowing ability of acquiring firms especially when they choose targets from developing countries, and when they have no previous experience in foreign markets.

Keywords:

• Financial leverage
• Cross-border acquisitions
• Internationalisation
• M&A
• UK

Acknowledgements

I am grateful to the Editor and two anonymous reviewers for their helpful comments and suggestions. All error, however, remain mine.

Notes

1 I am grateful to an anonymous reviewer for suggesting this argument.

2 In this paper, developed and developing countries are defined according to classifications by the International Monetary Fund (IMF, World Economic Outlook, April, 2011, p. 150). However, it should be noted that those countries classified as emerging by the IMF are considered as part of developing countries in this paper. Also, this article uses “developed” instead of “advanced” countries used in the IMF report. See link: http://www.imf.org/external/pubs/ft/weo/2011/01/pdf/text.pdf.

3 For robustness, the book leverage measure is also utilised, though these results are not reported in order to conserve space. The book leverage measure follows the market leverage definition, except that the market value of equity is substituted with the book value of equity. Results based on both measures were qualitatively similar.

4 The size and industry differences between the main sample (cross-border acquirers) and the control sample (domestic acquirers) and their effect on the leverage of the firms can be dealt with by either (a) constructing a size-and-industry-matched control sample; or (b) directly controlling for firm size and industry in a multivariate framework. The current article chose the latter approach because it has two main advantages: (1) it helps to directly observe/quantify the size and industry effect on leverage; and (2) it increases the explanatory power of the leverage (regression) model.

5 In unreported results, this paper finds that firms’ levels of internationalisation (as measured by their foreign assets ratio) significantly increase by about 11 percentage points following cross-border acquisitions. However, there is no statistically significant change in the levels of internationalisation when firms undertake domestic acquisitions. These results are available upon request.

6 Consistent with the tradition in capital structure research (e.g. AgyeiBoapeah, 2014; Uysal, 201-1), financial firms (e.g. banks, insurance companies, etc.) are excluded from the study because they have special asset compositions and are also subject to stricter government regulations which make them different from other firms.

7 That is, the data to calculate financial leverage and the control variables (e.g. firm size, profitability, risk, etc.) used in the regression model should be available.

8 As noted earlier, the definitions for MNCs and DCs are based on geographic segmental data. Since international accounting standards on segment reporting changed from IAS 14 to IFRS 8 with effect from 1st January, 2009, further tests were conducted to determine whether this regulatory change influenced the reported findings for H3. This was done by eliminating firms in year 2009 and repeating the empirical tests for only those sample firms that reported under IAS 14 (i.e. firms in 1982–2008). Also, in order not to include early adopters of IFRS 8 in the robustness tests, further tests that were restricted to sample firms in 1982–2007 were conducted. The cut-off date for this test was 2007 because IFRS 8 was issued on 30th November, 2006, and it is assumed that firms will need some time to study the new standard as well as alter their accounting systems to accommodate the standard. The results for both robustness tests (1982–2008 sample and 1982–2007 sample) were qualitative similar to those based on the full sample (1982–2009) that are reported in Models IV and V of Table 3. Thus, the results and conclusions of the current paper are robust to the change in the accounting regulation on segment reporting. To conserve space, the results for these robustness tests are not reported but are available upon request.

9 See link: http://www.bankofengland.co.uk/boeapps/iadb/repo.asp.