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Labor market regulations and cross-border mergers and acquisitions

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Abstract

This article exploits changes in country-level employment protection regulations as a source of plausibly exogenous variation in labor laws and finds that these regulations play an important role in cross‐border merger activity. Over the 1991–2009 period, countries that tighten employment regulations attract more foreign acquirers, especially those from countries with relatively more flexible labor regulations. The results appear to be robust to alternative specifications. Importantly these patterns are pronounced in those recipient country sectors in which foreign acquirers may find attractive targets at bargain prices: sectors with relatively high productivity and skill. The article also provides evidence suggesting that, because pro-labor reforms allow foreign acquirers to cherry pick more skilled and productive local firms, these transactions are associated with greater deal synergies and improved post-merger operating performance.

Abstract

Cet article examine les changements des réglementations nationales en matière de protection de l'emploi comme une source de variation exogène acceptable pour les droits du travail et montre que ces réglementations jouent un rôle important dans les fusions transfrontalières. Durant la période 1991-2009, les pays ayant renforcé les réglementations du travail ont davantage attiré des acquéreurs étrangers, en particulier ceux des pays où les réglementations du travail sont relativement plus souples. Les résultats semblent robustes par rapport à d'autres explications alternatives. On peut souligner que ces tendances concernent notamment les secteurs des pays bénéficiaires dans lesquels les acquéreurs étrangers peuvent trouver des cibles attrayantes à des prix avantageux : les secteurs caractérisés par une productivité et un savoir-faire relativement élevés. L'article met également en évidence que ces transactions sont associées à de plus grandes synergies d’affaires et à l'amélioration de la performance opérationnelle après la fusion, parce que les réformes en faveur du travail permettent aux acquéreurs étrangers de choisir les entreprises locales plus qualifiées et plus productives.

Abstract

Este artículo utiliza los cambios en las regulaciones de protección al empleo como una fuente de plausible variación exógena en las leyes laborales, y encuentra que estas regulaciones juegan un papel importante en la actividad de fusiones y adquisiciones transfronterizas. En el periodo 1991-2009, los países que contrajeron las regulaciones de empleo atrajeron más inversionistas extranjeros, especialmente en aquellos países con regulaciones laborales relativamente más flexibles. Los resultados parecen ser sólidos a especificaciones alternativas. Es importante destacar que estos patrones son relevantes en aquellos sectores de los países receptores en los que los adquirientes extranjeros pueden encontrar objetivos atractivos a precios de ganga: sectores con relativa alta productividad y mano de obra calificada. Este artículo también proporciona evidencia que sugiere que, debido a que las reformas pro-empleo permiten a adquisidores extranjeros seleccionar meticulosamente las firmas locales más calificadas y productivas, estas transacciones están asociadas con mayor cantidad de sinergias y mejor rendimiento operativo posterior a la fusión.

Abstract

Este artigo explora alterações na regulação de proteção do emprego a nível nacional como plausível fonte exógena de mudança em leis trabalhistas e conclui que essas regulações desempenham um papel importante na atividade de fusão transfronteiriça. Ao longo do período 1991-2009, os países que restringiram a regulamentação do trabalho atraíram mais compradores estrangeiros, especialmente aqueles de países com regulamentações trabalhistas relativamente mais flexíveis. Os resultados parecem ser robustos a especificações alternativas. É importante ressaltar que esses padrões são pronunciados em setores dos países beneficiários em que compradores estrangeiros podem encontrar alvos atraentes a preços baixos: setores com produtividade relativamente alta e especialização. O artigo também fornece evidências sugerindo que, visto que as reformas pró-trabalhistas permitem que os adquirentes estrangeiros escolham as empresas locais mais qualificadas e produtivas, essas operações estão associadas a maiores sinergias na negociação e melhor desempenho operacional pós-fusão.

Abstract

本文利用国家层面的就业保护法规的变化作为劳动法合理的外生变化, 发现这些法规在跨国并购活动中发挥着重要的作用。在1991-2009年期间, 加强就业法规的国家吸引了更多的外国收购者, 尤其是那些来自劳动法规相对比较灵活的国家的收购者。这一结果对于替代性的规范来说似乎是强健的。重要的是, 这些形态在那些外国收购者可能会发现价廉物美目标的接受国的行业里是明显的 : 即生产力和技巧都较高的行业。本文还提供证据表明, 因为赞成劳动法改革会允许外国收购者挑选更娴熟和更有生产力的本土公司, 所以这些交易与更大的交易协同效益密切相关, 而且可以改善并购后的经营绩效。

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Notes

  1. As it is common in the literature, this article uses mergers, acquisitions, deals and M&A terms interchangeably.

  2. The existing literature on cross-border M&As and foreign direct investment (FDI) is simply too vast to be comprehensively reviewed in this article. Thus I cite only those contributions that are closely related and/or help motivate the analysis. For surveys of the literature, I refer the interested reader to Dunning (1998), Caves (2007) and Antràs and Yeaple (2014).

  3. The next section provides more details about my analytical framework and testable implications.

  4. Understanding whether and how labor regulations affect other forms of FDI or firms’ entry modes is therefore beyond the scope of this article and left for future research.

  5. Unfortunately, data on the foreign institutional investor holdings from the Factset database is available starting only in 2000.

  6. Note that analysis of real performance gains also addresses a potential concern about target firm managers using stricter labor regulations as a bargaining chip to extract a higher takeover premium.

  7. Similar to Ahern et al. (2012), I hold that tax treaties tend to be signed for political reasons and that religious ties, like other cultural factors, are associated with deeper ties between countries. Thus while both tax treaties and religious ties can be related to bilateral merger intensity, it is not clear whether and how these instruments would affect the merger premiums or changes in acquirer’s profitability.

  8. The results of the probit regression are very similar to those reported in Table 5 and thus not tabulated.

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Acknowledgements

I am grateful to two anonymous referees and David Reeb (Area Editor) for very helpful suggestions. I thank Brandon Julio, Itay Goldstein, Jay Li, Yaxuan Qi, Qianqiang Huang, Junbo Wang, Jin Wang (discussant), and conference participants at the 2013 Asian Finance Association Meeting for their comments.I thank Yijie Chen for research assistance. All errors remain mine.

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Authors and Affiliations

  1. Department of Economics and Finance, City University of Hong Kong, Kowloon Tong, Hong Kong

    Azizjon Alimov

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Correspondence to Azizjon Alimov.

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Accepted by David Reeb, Area Editor, 6 April 2015. This article has been with the author for two revisions.

Appendix

Appendix

Table A1

Table A1 Variable descriptions and data source
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Table A2

Table A2 Total number of cross-border mergers by country pair
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Alimov, A. Labor market regulations and cross-border mergers and acquisitions. J Int Bus Stud 46, 984–1009 (2015). https://doi.org/10.1057/jibs.2015.16

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