Cross‐border and domestic minority acquisitions and financial constraints: Reaping big benefits from small shareholders

• Published date: 01 May 2023
• Author: Lucas S. Macoris,Luiz Ricardo Kabbach‐de‐Castro,Aquiles E.G. Kalatzis,Dirk M. Boehe
• Date: 01 May 2023
• DOI: http://doi.org/10.1111/corg.12466

ORIGINAL ARTICLE

Cross-border and domestic minority acquisitions and financial

constraints: Reaping big benefits from small shareholders

Lucas S. Macoris

1

|Luiz Ricardo Kabbach-de-Castro

2,3

|Aquiles E.G. Kalatzis

4

|

Dirk M. Boehe

5

1

Institute of Education and Research (INSPER),

S˜ao Paulo, Brazil

2

School of Economics and Business, University

of Navarra, Pamplona, Spain

3

Warrington College of Business, University of

Florida, Gainesville, Florida, USA

4

Industrial Engineering Department (EESC/

USP), University of S˜ao Paulo, S˜ao Paulo, Brazil

5

Africa Business School, Strategic

Management at Université Mohammed VI

Polytechnique (UM6P), Ben Guerir, Morocco

Correspondence

Luiz Ricardo Kabbach de Castro, School of

Economics and Business, University of

Navarra, Pamplona, Spain.

Email: luiz.kabbach@warrington.ufl.edu

Funding information

Coordenaç˜ao de Aperfeiçoamento de Pessoal

de Nível Superior—Brasil (CAPES)—Finance

Code 001; Fundaç˜ao de Amparo à Pesquisa do

Estado de S˜ao Paulo, Grant/Award Number:

2013/26512-8

Abstract

Research Question/Issue: Do the motivations of cross-border minority acquisitions

differ from those of domestic minority acquisitions? We examine and compare the

underlying motivations for and consequences of domestic and cross-border minority

acquisitions by analyzing data from transactions that took place across 31 countries

over a 13-year period.

Research Findings/Insights: Using a sample of 11,926 domestic and cross-border

minority acquisitions, we show that the interplay of financing and country-level gov-

ernance motives is the main driver of such deals in both settings. We find that finan-

cially constrained firms are more likely to engage in both domestic and cross-border

minority acquisitions, even in the face of higher information asymmetry and transac-

tion costs that international transactions entail. In the wake of either domestic or

cross-border deals, financially constrained firms' long-term debt increases; their

short-term debt, cash holdings, and equity decrease. The greater likelihood of minor-

ity acquisitions of financially constrained firms is explained by the degree of corpo-

rate governance institutions in the country in which the targeted firm is based and by

differences in levels of creditor and shareholder protections between the home coun-

tries of the targeted and acquiring firms involved. Our results remain robust after

controlling for alternative explanations such as the contracting motive, the gravity

model of foreign transactions, economic development levels, and differences in tax

and exchange rates.

Theoretical/Academic Implications: Our results extend prior literature on mergers

and acquisitions that have focused solely on control transfers or domestic deals. We

provide empirical evidence for the importance of jointly considering financing and

governance motivations in seeking to explain domestic and cross-border minority

acquisitions and their consequences in alleviating financial constraints. We provide

new evidence on how firm- and country-level characteristics interact to affect minor-

ity acquisitions.

Received: 11 August 2020Revised: 17 February 2022Accepted: 19 February 2022

DOI: 10.1111/corg.12466

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any

medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.

© 2022 The Authors. Corporate Governance: An International Review published by John Wiley & Sons Ltd.

Corp Govern Int Rev. 2023;31:491–514. wileyonlinelibrary.com/journal/corg 491

Practitioner/Policy Implications: Our results offer valuable insights for business pol-

icy by highlighting how firms can circumvent financial constraints through partial

integration, especially in cross-border settings. The results also offer evidence of ben-

eficial ex post outcomes for targeted firms' leverage and liquidity. In terms of public

policy, the results show that minority shareholder protections improve the equity

market and provide a positive externality to the debt market through a certification

effect.

KEYWORDS

corporate governance, domestic and cross-border acquisitions, financial constraints, investor

protection, minority acquisitions

1|INTRODUCTION

Do the motivations for cross-border minority acquisitions differ from

those of domestic minority acquisitions? Minority acquisitions—

transactions in which the buyer acquires less than 50% of the target—

have grown over recent decades; they now represent 35% of all

mergers and acquisitions (M&A) in 2020, up from 20% in the 1990s

(Kengelbach et al., 2020). Prior research aiming to understand the

determinants of minority acquisitions has shown that target firms'

financial constraints are the primary driver of these transactions

(Liao, 2014; Ouimet, 2013). When targeted firms are financially con-

strained, they are more likely to sell a minority stake to provide

finance for investment opportunities that otherwise would be hin-

dered either because of high capital costs or the lack of alternative

sources of external capital.

By focusing exclusively on domestic minority acquisitions, even

when examining a sample of international transactions, prior studies

have held constant cross-country corporate governance and varia-

tions in transaction costs. Therefore, little is known about the trade-

offs between domestic and cross-border minority acquisitions under

financial-market frictions. Once minority acquisitions cross borders,

transaction costs tend to increase (Hennart, 2000), and therefore, the

relevance of financing motivations may change for acquisitions that

take place in international contexts. Moreover, institutional differ-

ences between home and host countries may affect the decisions of

both buyers and sellers to enter into minority acquisitions

(Baulkaran & Lupton, 2020; Globerman & Shapiro, 2003).

This paper examines the potential trade-offs between cross-

border and domestic acquisitions by examining the differences and

similarities in the determinants of minority acquisitions that take place

in domestic and cross-border settings, and by assessing the implica-

tions for target firms' financing decisions. We investigate how target

firms' financial constraints jointly interact with country-level corporate

governance to explain minority acquisitions across cross-border and

domestic transactions. We use a sample of 11,926 minority transac-

tions that took place from 2002 to 2014 involving 31 countries. We

find a positive relationship between measures of financial constraints

(such as the Whited and Wu [WW] Index, Whited & Wu, (2006); and

Size–Age (SA) Index, Hadlock & Pierce, 2010) and the likelihood of

minority acquisitions for both domestic and cross-border transactions.

The financing perspective posits that in the wake of a minority acqui-

sition financially constrained firms' cash holdings should decrease, and

debt should rise (Liao, 2014). Our results corroborate this argument.

We show that target firms' long-term debt rises compared to the debt

levels of matched firms that did not enter into a minority transaction.

We also show that cash holdings significantly decrease for target firms

that were involved in either cross-border or domestic transactions.

Moreover, our research fills a research gap by showing whether

and how country-level corporate governance affects the likelihood

and consequences of minority acquisitions of financially constrained

firms. We extend the prior literature by showing a significant impact

of two cross-border governance issues: investor protections in the

country in which the targeted firm is based, and the differences in

creditor and shareholder protections of the two countries in which

targeted and acquiring firms are based. For example, the stronger that

creditor protections are in the target country, the lower the likelihood

is that a minority acquisition will emerge. This can be explained by the

fact that in a world of imperfect capital markets with asymmetric

information, better creditor protections increase the availability of

credit, reducing the need for investments by acquirers of minority

stakes in financially constrained firms (Myers, 2001).

Our results show that strong shareholder protections have differ-

ent effects for cross-border and domestic transactions. While strong

minority shareholder protections increase the likelihood of minority

acquisitions, they decrease the likelihood of domestic transactions.

On the one hand, shareholder protections generally raise the probabil-

ity of cross-border minority acquisitions because acquirers are more

likely to target firms in those countries where they enjoy greater

minority shareholder protections than in their home country. Foreign

firms generally have a harder time conducting proper due diligence

about potential acquisition targets abroad due to the high information

and transaction costs. Therefore, stronger minority shareholder pro-

tections can compensate for such disadvantages. On the other hand,

in the domestic market, information costs are lower and acquirers

have alternative ways to obtain relevant information (e.g., through

social networks, as in Nguyen et al., 2022). Therefore domestic

492 MACORIS ET AL.