The value of institutional shareholders

Abstract

Purpose – By integrating agency theory with the institution-based view, the purpose of this paper is to examine whether-and if so, how-the likelihood of completion of cross-border acquisitions (CBAs) is influenced by institutional shareholders, in interaction with institutional quality and constraints both at the country and firm levels. Design/methodology/approach – After controlling for endogeneity by the latent instrumental variable (LIV) approach, the authors test the hypotheses using a sample of CBAs undertaken by Chinese listed firms during the period 2002-2012. Findings – The authors find that as institutional shareholders tend to enhance the quality of corporate governance, an overseas acquisition attempt undertaken by acquiring firm with greater institutional ownership is more likely to be completed. This relation is more prominent when the acquisition is exposed to inferior institutional context, such as when the target firm is domiciled in countries with weaker institutional quality, the acquiring firm is state-controlled, or the target is publicly traded in stock markets. Research limitations/implications – An additional focus on the share-price reaction to the announcement or long-term alliance performance of such CBAs may reveal the relative importance of institutional shareholders in CBAs. The potential varying effects between domestic and foreign institutional investors deserve to be tested. Other factors, for instance antitrust laws, could be further studied. Practical implications – The results will better inform and enhance governance and internationalization strategies of Chinese firms that are expected to undertake CBAs activities in areas such as the cooperation with institutional shareholders, the choice of target domiciled location, the reform of ownership structure, and the selection of target’s types in host country. In addition, given a broadly similar pattern of legal evolution between China and many other emerging countries since the 1990s (Peng and Heath, 1996), China’s experience may also provide valuable lessons and insights for firms from other emerging economies when undertaking CBAs activities in their internationalization strategies. Originality/value – This study develops a theoretical link of firm-specific characteristics and country-level factors into an integrated analytical framework by applying agency theory in interaction with institution theory into literature on CBAs. This theoretical framework varies from most of extant studies often using a single theory into their analysis and would thus provide a new analytical train of thought for future studies.