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The cost of pride: Why do firms from developing countries bid higher?

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Abstract

Using an extensive panel of cross-border M&A transactions between 1990 and 2007, we find that firms from developing countries, compared with those from developed countries, bid higher on average to acquire assets in developed countries. We are interested in why these higher bids occur. We find that bids of firms from developing countries are higher in cases where the transaction displays “national pride” characteristics, where national pride is identified through a manual examination of media articles. These results, which are robust to numerous specifications (including alternative measures of national pride) and control variables, are both statistically and economically significant, and highlight a source of pride beyond personal hubris that potentially influences corporate decision-makers.

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Notes

  1. Source: Thomson Financial M&A Review, Fourth Quarter 2006.

  2. Source: UNCTAD, World Investment Report Overview 2007, 5.

  3. Source: UNCTAD, World Investment Report 2006, 108–109.

  4. Kahneman and Tversky (1979), Thaler (1992), and Benartzi and Thaler (1995) provide many useful references to this literature.

  5. Some psychologists (e.g., Lewis, 1992; Tracy & Robins, 2004) make a clear distinction between hubris and pride. For the purposes of our study we do not make this distinction, and refer to these terms interchangeably.

  6. The link to empire building can also be found in the literature on global diversification, which points toward the existence of a geographic diversification discount (e.g., Denis, Denis, & Yost, 2002).

  7. See also Inglehart (1997) and Smith and Jarkko (2001).

  8. Note that we do not look for indications that the bidder “overpaid” when coding national pride sentiments. In our examination of news articles, we do not perceive that national pride sentiments are correlated with the author's belief or discussion of overpayment. Therefore, while our coding of national pride is subjective, we have no reason to believe that overpayment considerations motivate discussion of national pride in news articles. In addition, we discuss below a more objective measure of national pride that also is not expected to correlate with overpayment beliefs.

  9. Even if the source of the national pride sentiment picked up in media articles is someone other than the manager, the underlying idea is that the manager has been affected by this sentiment. In addition, it is reasonable to assume that a press report is based on interviews with company officials (e.g., CEO or CFO) or other highly qualified personnel.

  10. Our objective is to identify the existence of national pride, and not to grade its intensity. In other words, for the purposes of our coding, a single article carrying an indication of national pride carries the same weight as multiple articles indicating the same. To illustrate the media coverage involved, there are 8676 media articles in total for the 295 bids (and 4520 articles for the national pride bids).

  11. For completeness, we classify national pride bids using media articles discussing national pride on either the bidder or the target side and later report results of tests in which we separate the effects of bidder and target side national pride.

  12. Source: http://unstats.un.org/unsd/methods/m49/m49regin.htm#developed. Since there is some debate over the classification of countries as developed or developing, as a sensitivity check for the first-stage results we replace the developing-country indicator by differences in GDP per capita (between bidder and target nations). Untabulated analysis shows that no inferences are affected by instead using this continuous measure.

  13. The use of a 4-week window to measure the bid premium addresses issues pertaining to early leakage of news regarding the bid and rumors, if any. It is also consistent with prior studies such as Rossi and Volpin (2004). Inferences are unaffected if we instead use 1-week or 1-day windows to measure the premium.

  14. Note, however, that our inferences about national pride are not affected if we include observations with negative premiums.

  15. Our data requirements imply that the target firms in our sample are all public firms, whereas bidder firms could be public or privately held.

  16. Untabulated statistics show that the 295 bids are quite evenly spread across years (except for a peak in 2006, representing 12% of the sample firms). The 36 cases classified as national pride bids are also quite evenly distributed over time (with peaks in 1995 and 2006).

  17. In untabulated analyses we also control for whether the bidding firm is from the same industry as the target.

  18. Though we use a control for the outcome of the deal (successful or unsuccessful), in other sensitivity tests we examine whether our results on national pride hold true if we exclude unsuccessful bids (i.e., bids that were not accepted). We find that inferences are unaffected when considering only successful bids.

  19. Many studies document that national culture affects managerial decisions in a variety of settings (e.g., Gray, 1988; Hofstede, 1980; Hope, 2003; House, Hanges, Javidan, Dorfman, & Gupta, 2004; Salter & Niswander, 1995; Stulz & Williamson, 2003).

  20. In the fifth section of this article we report that results are robust to including several additional controls in our empirical models.

  21. We have also run tests with standard errors clustered by: (1) target two-digit SIC code; (2) bidder nation; and (3) target SIC code-bidder country. The national pride indicator remains significant under all standard error specifications. Furthermore, no inferences are affected if we either winsorize or delete the top and bottom 1% of premium observations.

  22. There is no significant multicollinearity present in any of the results shown in the paper. Specifically, the highest variance inflation factor for any of our key independent variables in the regression tests reported is 2.92.

  23. Recall that the dependent variable in our tests is the natural logarithm of the bid premium. Thus a coefficient of 0.149 translates into a 16% higher premium.

  24. Untabulated statistics show that country, year, and industry fixed effects are significant at the 5% level or better.

  25. The difference in shareholder protection between the bidder and target country potentially better captures differences in corporate governance structures. Results are robust if we instead use the difference in shareholder protection.

  26. A caveat to this finding is that an excess of savings in developing countries relative to developed countries may create a demand for assets in developed countries. Note that this potential omitted variable does not affect our inferences from our main test regarding the effect of national pride.

  27. This argument is supported by our extensive reading of media articles. We observe that national pride sentiments (as defined earlier) typically arise when a firm from a developing country acquires well-known global or Western corporate brands, or acquires firms owned by ex-colonizers. Internationally known brands or corporations are more often than not from developed countries, and most ex-colonizers are developed countries from the Western hemisphere.

  28. In a pooled test (including both developed and developing targets), the coefficient is positive and significant for developing-country acquisitions of developed targets, but not significant for developing-country acquisitions of developing targets.

  29. Since our dependent variable is truncated at zero (i.e., we include only positive premiums), as a robustness test we reestimate the empirical tests using Tobit instead of OLS. National pride remains positive and significant (at the 0.01 level using a two-tailed test) in all these tests.

  30. In additional analysis we have checked whether our sample firms cross-listed on a US stock exchange following the M&A transaction. We find that of the 295 observations, five cross-list after the bid date. Most importantly, none of our 36 national pride bid firms are cross-listed.

  31. Untabulated statistics show that both country and industry fixed effects are significant at the 1% level and that year fixed effects are not significant.

  32. Of the 36 bids total national pride bids, we find that 25 emanate from the bidder side and 11 from the target side. While the coefficient on target side national pride is not significant, it seems economically significant (albeit smaller in magnitude than for bidder side pride), possibly because of the low statistical power of the test. However, inferences are not changed if we use bootstrapping with various numbers of replications (ranging from 50 to 1000).

  33. This test was suggested to us by a reviewer. Note that since we do not code national pride sentiments for the sample of bidders from developed countries, for those observations national pride takes the value of 0 in this regression. We believe that our assumption that developed-country bidders are not influenced by national pride when bidding on targets in developing countries is logical, consistent with discussions in financial press, and consistent with prior academic research, as discussed in the second section.

  34. For a practical example of this line of argument, see for example, Giridharadas (2007). The article states that: “As ever more Indian acquisition deals were announced, most of them smaller and less controversial, a kind of takeover nationalism emerged. This has hit its zenith, perhaps, with a new marketing campaign by The Times of India called ‘India Poised’”. See also Capron and Guillén (2006). The article states that: “The Mittal–Arcelor battle inspired an exceptional media frenzy, but it is not an isolated case …”.

  35. The Pearson correlation between national pride and media coverage (excess media coverage) is 0.159 (0.126) with a two-sided p-value of 0.006 (0.031).

  36. The adjusted R2 of this regression is 0.33.

  37. Our media coverage measures could also be viewed as additional controls for variations in (firm-level) corporate governance (e.g., Dyck et al., 2008).

  38. We have also used an alternative excess media coverage that controls for target firm size as well as industry, year, and country fixed effects (i.e., cross-sectional controls). More specifically, we estimate the following model: log(Media coverage)=a+blog(Target book value) +c(Industry effects)+d(Year effects)+e(Target nation effects) +*(Bidder nation effects)+h.

  39. Please note that, although we comment on each additional control variable separately, the national pride indicator remains positive and significant (at the 1% level) also after including all these controls in the same regression.

  40. Source: The European Values Study Foundation and World Values Survey Association (2006).

  41. In our sample of 295 bids, there are 42 private firm bids and 44 bids by government-controlled firms (i.e., more than 50% of the shares are owned by a government). Of the 36 national pride bids, seven are from private firms and two are from government entities.

  42. However, using data provided by Faccio (2006), we find no evidence that our results for national pride are driven by firms that are politically connected.

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Acknowledgements

We have received useful comments from Laurence Booth, Feng Chen, Russell Craig, Gus De Franco, Alexander Dyck, Evgenia Golubeva, Paul Halpern, Sanjay Kallapur, Emre Karaoglu, Robert Magee, Jan Mahrt-Smith, William Megginson, Lee Radebaugh (Editor), Rina Ray, Wendy Rotenberg, Wolfgang Schultze, Han Yi, three anonymous reviewers, and seminar participants at Chulalongkorn University, Manchester Business School, Norwegian School of Economics and Business Administration, University of Oklahoma, University of Saskatchewan, the IAS meeting (San Diego), the EAA meeting (Rotterdam), the AAA meeting (Los Angeles), the CLEA Conference (Toronto), the Indian School of Business Research Conference, the Harvard Business School International Research Conference, and the Journal of Corporate Finance Conference (Beijing). Hope gratefully acknowledges the financial support of the Deloitte Professorship.

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  1. Rotman School of Management, University of Toronto, Ontario, Canada

    Ole-Kristian Hope & Dushyantkumar Vyas

  2. Michael F. Price College of Business, University of Oklahoma, Norman, USA

    Wayne Thomas

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  1. Ole-Kristian Hope
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Correspondence to Ole-Kristian Hope.

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Accepted by Lee Radebaugh, Area Editor, 22 December 2009. This paper has been with the authors for four revisions.

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Hope, OK., Thomas, W. & Vyas, D. The cost of pride: Why do firms from developing countries bid higher?. J Int Bus Stud 42, 128–151 (2011). https://doi.org/10.1057/jibs.2010.5

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