The Role of Corporate Governance for

Acquisitions by the Emerging Market

Multinationals: Evidence from India

Burcin Col and Kaustav Sen

Pace University, New York

CGEM Conference, HHL Leipzig, September 2015

The research question

• The documented reasons why firms emerging market (EM) firms acquire developed market (DM) targets

• Improve R&D capabilities (Hege, Jaslowitzer and Rapp, 2014)

• Internationalize acquirer’s tangible and intangible resources and exploit the complementary nature of the two firms (Gubbi, Aulakh, Ray, Sarkar and Chittor, 2010)

• Restructuring operations of the target (Chen, 2011 and Chari, Chen and Dominguez, 2012)

• Can it also be because EM acquirers want to bond with the institutional practices of DMs (Coffee, 1999)?

India Goes Global…

• Accenture report titled as “India Goes Global: How Cross-border

Acquisitions are Powering Growth”, pg. 16

• “Where possible, Indian companies should treat the governance standards of

companies they are acquiring as an additional asset. For example, the well-reported

Mittal-Arcelor deal was carefully constructed to allow the new company to benefit

from Arcelor’s highly evolved corporate governance and operating structures.”

What we do in this paper

• We examine whether emerging market (EM) firms, in particular Indian firms,

acquiring targets located in developed markets (DM) implement corporate

governance changes that indicate adapting the target country practices.

• We conduct two sets of tests

• Compare the CG changes of the DM acquirers with a control sample of domestic

acquirers

• Examine whether country level indicators explain the cross-sectional variation in

the CG changes implemented by the DM acquirers

• We also examine the effect of implementing the CG changes on firm valuation.

Main results

Using Indian firm-level data between 2001-2010:

• Ownership and board characteristics change significantly after EM-DM

acquisitions

• CG change is more pronounced for DMs with better country-level investor

protection

• Higher valuation associated with the changes in CG

Contribution

• We extend the literature on corporate governance effects of cross-border

M&As by focusing on specific issues

• We restrict to EM acquirers and DM targets since the institutional

framework is starkly different between the two settings, and any CG changes

observed due to the transaction is most likely due to these differences and

not any other reason

• Our study is one of the very few that examines the effects at the firm level;

most of the prior studies are at the country level (see Bris and Cabolis(2008),

Martynova and Reneboog (2008), Col and Errunza (2015))

• We examine the role of EM regulation in CG changes by DM acquirers

Spillover and Bootstrapping

• Martynova and Renneboog (2008) proposes two alternative hypotheses

regarding CG in cross border M&As

• Spillover, where the acquirers CG practices are adapted by the target. It can

be positive, where better governed acquirers improve the practices of the

target, or it can be negative, where the bad practices of the acquirer affects

the target negatively. Chari, Oimet and Tesar (2011) find DM acquirers of

EM targets and add value to the acquirers through positive announcement

returns i.e. positive spillover.

• Bootstrapping, where the acquirer adapts to the target’s practices

We hypothesize bootstrapping …

• We argue that in the specific “EM acquirer – DM target” setting,

bootstrapping will hold because the benefits from such acquisitions will not

accrue unless the target nation’s CG practices are adapted.

• The literature identifies the following benefits

• development of organizational capabilities and learning (Bartlett and Ghoshal,

1989; Hitt, Hoskisson, and Kim, 1997)

• as well as to benefit from partnering with firms from institutionally different

environments by providing access to complementary resources (Gubbi et al. 2010)

• reduce risk (Kim, Hwang and Burgers, 1993)

• improve deficiencies across nationally bounded interfirm networks (Burt, 1992).

Hypotheses

• H1: In order to realize benefits from acquiring developed market targets, emerging market firms bootstrap their corporate governance practices to comply with target country norms.

• H2: Indian firms that acquire developed market targets with better investor protection and legal environment are more likely to adjust firm-level governance.

• H3: Firm valuation is higher for those that adjust firm-level governance after acquiring the developed market targets.

Data source

• M&A data SDC Thompson’s International M&A database for January

2001 and December 2010: 595 completed acquisitions.

• Control sample consists of acquisitions by Indian companies that target

firms in India for the same period: 2,193 such acquisitions.

• Data for the acquiring companies from Prowess, distributed by Center

for Monitoring the Indian Economy (CMIE).

Tables 1 and 2: Sample and Descriptives

Target Nation N %

Australia 7 3.02 %

Belgium 2 0.86 %

Canada 7 3.02 %

Denmark 1 0.43 %

Finland 5 2.16 %

France 7 3.02 %

Germany 22 9.48 %

Italy 6 2.59 %

Japan 2 0.86 %

Netherlands 7 3.02 %

Spain 7 3.02 %

Sweden 2 0.86 %

Switzerland 4 1.72 %

United Kingdom 42 18.10 %

United States 111 47.84 %

Total 232 100%

Frequency DM India Total

2001 1 6 7

2002 9 19 28

2003 14 14 28

2004 15 22 37

2005 28 61 89

2006 39 58 97

2007 52 65 117

2008 20 76 96

2009 14 54 68

Total 192 375 567

Table 3 - Descriptive Statistics

Category Variable Mean Median t value Std Dev N

Treatment Sample (Target Country = DM)

Valuation Tobin's Q (Ind-adjusted) 0.264 0.084 1.1 3.235 192

Ownership FII ownership 12.383 9.310 14.4 11.925 192

Institutional ownership 21.231 20.025 19.9 14.821 192

Promoter ownership 45.953 44.045 35.0 18.213 192

Board Characteristics Board independence 0.607 0.606 55.8 0.128 138

Board busyness 4.086 4.000 14.7 3.271 139

Board diligence 0.786 0.796 66.1 0.109 84

Control Sample (Target Country = India)

Valuation Tobin's Q (Ind-adjusted) -0.017 -0.243 -0.2 1.489 375

Ownership FII ownership 8.062 3.700 14.9 10.410 372

Institutional ownership 15.521 11.290 19.4 15.439 372

Promoter ownership 50.531 52.500 49.5 19.686 372

Board Characteristics Board independence 0.625 0.625 73.6 0.138 264

Board busyness 3.773 3.000 18.7 3.278 264

Board diligence 0.753 0.750 77.6 0.125 166

Methodology

• By subtracting the attribute values of each firm before the acquisition from the

corresponding values after the acquisition, we allow for each firm to be its own

control (Cook and Campbell 1979, p103). The models we use are

1. Change in corporate governance = f (DM, control variables, DM*control variables)

2. Change in corporate governance = f (IED, control variables, IED*control variables)

3. Change in valuation = f (DM, CG, CG*DM, control variables, DM*control

variables, CG*control variables)

Table 4 – Change in corporate governance and valuation after acquisition

CategoryVariable

(post-pre)DM India DM -India t

Kruskal-

Wallis

N

(DM)

N

(India)

Valuation Tobin's Q (Ind-adjusted) -0.375 -0.320 -0.056 -0.4 2.254 184 356

Ownership FII ownership 2.619 1.675 0.944 1.3 3.713* 187 356

Institutional ownership 3.279 1.690 1.589 1.8* 5.419** 187 356

Promoter ownership -2.883 0.058 -2.940 -3.4*** 9.150*** 187 356

Board

Characteristics

Board independence 0.035 -0.003 0.038 2.6*** 8.761*** 114 204

Board busyness -1.386 -0.848 -0.538 -2.3** 9.373*** 114 204

Board Diligence 0.015 0.010 0.005 0.2 0.051 36 112

Table 5 - Change in Corporate Governance : Institutional and Insider Ownership

Dependent Variable Institutional

Ownership

FII Ownership Promoter

Ownership

DM 18.123 ***

(3.53)

10.026*

(1.81)

-17.258*

(-1.78)

SIZE 0.912***

(3.37)

0.308*

(2.01)

MTB 0.928***

(16.14)

0.814***

(17.93)

ROE 0.233

(0.42)

0.794**

(2.34)

ADRGDR 2.639

(1.47)

SALES -2.824***

(-7.20)

SQ_SALES 0.176***

(6.41)

K/S -0.863***

(-16.12)

Y/S 0.525***

(19.07)

I/K -0.024

(-1.07)

SIGMA 0.104

(1.51)

Dependent Variable Institutional

Ownership

FII Ownership Promoter

Ownership

SIZE *DM -1.927***

(-3.15)

-1.143

(-1.63)

MTB*DM -0.626

(-1.61)

-0.596**

(-2.44)

ROE*DM 4.747

(1.30)

5.181

(1.06)

ADRGDR*DM -1.772

(-0.25)

SALES*DM 2.197

(0.88)

SQ_SALES*DM -0.064

(-0.39)

K/S*DM 1.224***

(3.61)

Y/S*DM -0.507

(-1.43)

I/K*DM 0.079***

(3.24)

SIGMA*DM 0.663

(1.12)

Industry FE Yes Yes Yes

N 261 261 392

Adj R-squared 0.0579 0.1090 0.1153

Table 6- Change in Corporate Governance- Board Characteristics

Dependent Variable Board

Independence

Board

Busyness

Board

Diligence

SIZE *DM -0.013***

(-4.01)

0.154*

(1.97)

-0.053***

(-5.24)

Q*DM 0.028*

(2.11)

-0.087

(-1.12)

-0.025***

(-2.92)

ROA*DM 0.039

(0.27)

-0.522

(-0.17)

0.401***

(3.36)

CONC*DM -0.251**

(-2.18)

FCF*DM -3.242**

(-2.76)

AGE*DM -0.001

(-1.61)

LEV*DM 0.066

(1.17)

INSTOWN*DM 0.050***

(4.22)

0.001

(0.87)

BIGFOUR*DM -1.428***

(-4.92)

0.094***

(4.41)

ADRGDR*DM 0.831

(1.33)

0.212***

(9.17)

Industry FE Yes Yes Yes

N 295 328 164

Adj R-squared 0.0666 0.0702 0.1536

Dependent Variable Board

Independence

Board

Busyness

Board

Diligence

DM 0.147***

(3.83)

-2.127***

(-4.29)

0.422***

(4.63)

SIZE 0.001

(0.17)

-0.077

(-1.69)

-0.008***

(-6.87)

Q 0.001

(0.65)

-0.268

(-12.04)

0.013

(22.41)

ROA -0.048*

(-1.98)

3.161***

(3.90)

-0.226***

(-4.03)

CONC 0.284***

(19.19)

FCF 0.329*

(2.01)

AGE 0.000

(0.82)

LEV -0.069**

(-2.96)

INSTOWN -0.027***

(-11.37)

0.001***

(8.17)

BIGFOUR 0.706***

(13.18)

-0.001

(-0.17)

ADRGDR -0.784***

(-10.64)

-0.114***

(-36.71)

Table 7: Change in Corporate Governance (Ownership) and Country-level Regulations

Dependent Variable Institutional

Ownership

Institutional

Ownership

FII

Ownership

FII

Ownership

Promoter

Ownership

Promoter

Ownership

Shareholder_prot 4.858

(1.30)

23.505*

(1.82)

-21.630**

(-2.82)

Creditor_prot 12.467***

(3.07)

8.298*

(2.04)

-7.204***

(-5.34)

SIZE -0.5304***

(-4.56)

-0.649***

(-3.23)

-0.434**

(-2.29)

-2.014

(-0.87)

MTB 0.534***

(12.24)

0.411**

(2.35)

0.269***

(6.27)

-0.745

(-1.33)

ROE -7.821

(-1.33)

-4.173

(-0.53)

-0.291

(-0.09)

18.274*

(1.80)

ADRGDR -1.618

(-0.27)

6.906

(1.49)

SALES -5.263***

(-3.48)

-2.7604

(-1.37)

SQ_SALES 0.293**

(2.95)

0.133

(1.05)

K/S -2.193***

(-4.28)

-0.203

(-1.73)

Y/S 0.382

(1.61)

0.089

(0.54)

SIGMA -1.030***

(-5.74)

-1.336**

(-2.73)

Control variables (interactions) Yes Yes Yes Yes Yes Yes

Industry FE Yes Yes Yes Yes Yes Yes

N 185 185 185 185 185 185

Adj R-squared 0.0249 0.0207 0.0124 0.0248 0.0308 0.0433

Table 8: Change in Corporate Governance (Board Characteristics) and Country-level Regulations

Dependent Variable Board

Independence

Board

Independence

Board

Busyness

Board

Busyness

Board

Diligence

Board

Diligence

Shareholder_prot 2.175***

(5.52)

-1.666***

(-6.24)

0.042*

(1.98)

Creditor_prot -0.096

(-0.42)

-0.605***

(-3.85)

0.957

(0.59)

SIZE -0.027**

(-2.28)

-0.179***

(-4.18)

0.249**

(2.43)

0.965

(0.55)

-0.051***

(-5.21)

-0.054***

(-5.08)

Q 0.025***

(3.41)

0.087***

(5.44)

-0.362***

(-4.22)

-0.345*

(-1.79)

-0.008

(-1.15)

-0.009

(-1.12)

ROA -0.475***

(-3.63)

-0.140

(-1.35)

3.061**

(2.62)

5.446

(0.35)

-0.154

(-1.08)

-0.133

(-0.92)

CONC -2.124

(-0.58)

2.391

(0.87)

FCF -2.015

(-1.60)

-0.343

(-0.14)

AGE -0.001

(-0.30)

0.080**

(2.47)

LEV -0.089

(-1.40)

INSTOWN 0.025*

(2.01)

0.002

(0.03)

0.002

(1.81)

0.002*

(2.13)

BIGFOUR -0.901**

(-2.51)

-0.258

(-0.69)

0.090**

(2.86)

0.091**

(2.95)

ADRGDR 0.377**

(2.39)

-0.172

(0.07)

0.030

(0.88)

0.010

(0.35)

Control variables(interactions) Yes Yes Yes Yes Yes Yes

Industry FE Yes Yes Yes Yes No No

N 102 102 119 119 45 45

Adj R-squared 0.1446 0.0556 0.0888 0.0748 0.1005 0.1002

Tables 9 and 10: Tobin’s Q and Corporate Governance

Governance Variable Institutional Ownership Institutional OwnershipFII FII Promoter Promoter

Ownership Ownership Ownership Ownership

DM2.484** 2.357* 2.426** 1.651* 2.346* 1.770*

-2.3 -2.1 -2.18 -2 -2.06 -2.05

Q (t-1)0.675*** 0.681*** 0.662*** 0.652*** 0.674*** 0.653***

-10.66 -10.91 -13.6 -14.29 -12.06 -15.26

GOV0.01 0.005** -0.001**

-0.01 -2.48 (-2.30)

GOV*DM0.03 0.042 0.006

-1.73 -1.71 -0.7

GOV_DIFF0.0103 -0.037 -0.024

-0.19 (-0.86) (-0.62)

GOV_DIFF*DM0.317*** 0.026*** -0.537*

-7.17 -6.66 (-2.11)

N 491 491 491 491 491 491

Adj R-squared 0.3469 0.3519 0.3493 0.3444 0.3473 0.3435

Governance Variable Board Independence Board IndependenceBoard Board Board Board

Busyness Busyness Diligence Diligence

DM2.545* 1.463* 0.895 1.452* 0.68 0.962

-1.94 -1.96 -0.87 -1.78 -0.13 -1.3

Q (t-1)0.532*** 0.655*** 0.855*** 0.632*** -0.257 0.624***

-7.53 -17.68 -3.93 -16.61 (-0.20) -23.77

GOV0.418 0.027 -10.88

-0.82 -1.16 (-1.49)

GOV*DM-5.852 -0.098 -9.444

(-1.28) (-1.14) (-1.84)

GOV_DIFF0.05 0.033 0.292***

-0.23 -1.49 -16.82

GOV_DIFF*DM0.038** 0.517 2.871***

-2.18 -0.88 -3.26

N 292 292 292 292 153 153

Adj R-squared 0.2359 0.3387 0.2547 0.3433 0.2286 0.4053

Table 11: Changes in Ownership before and after Clause 49

MEAN MEDIAN

Before 2005 After 2005 (p-value) Before 2005 After 2005 (p-value)

Institutional

Ownership

3.575***

(24)

1.141*

(114)

(0.0910) 1.945*

(24)

0.190

(114)

(0.1925)

Foreign

Institutional

Ownership

4.472***

(24)

1.674**

(114)

(0.0569) 3.940***

(24)

0.245*

(114)

(0.0091)

Promoter

Ownership

-1.409**

(24)

-0.285

(114)

(0.2126) -0.085

(24)

-0.055

(114)

(0.8157)

Conclusion

• We conduct a tightly focused study to examine whether the

bootstrapping hypothesis is valid when the acquirer is a EM firm and

the target is a DM firm. Our results confirm this hypothesis.

• We also find that the positive valuation effects are due to the CG

changes adapted after the acquisition.

• Corporate governance regulation implemented in India Clause 49

reduces the bootstrapping effect.

Thank you!