Institutional investors and cross‐border mergers and acquisitions: The 2000–2018 period

• Published date: 01 September 2023
• Author: Jinsuk Yang,Qing Hao,Mahmut Yaşar
• Date: 01 September 2023
• DOI: http://doi.org/10.1111/irfi.12409

ORIGINAL ARTICLE

Institutional investors and cross-border mergers

and acquisitions: The 2000–2018 period

Jinsuk Yang

1

| Qing Hao

2

| Mahmut Yas¸ar

3

1

Department of Accounting and Finance,

University of Southern Indiana, Evansville,

Indiana, USA

2

Department of Finance and Real Estate,

University of Texas at Arlington, Arlington,

Texas, USA

3

Department of Economics, University of

Texas at Arlington, Arlington, Texas, USA

Correspondence

Jinsuk Yang, Romain College of Business BE

2079, Department of Accounting and

Finance, University of Southern Indiana, 8600

University Boulevard, Evansville, IN 47712,

USA.

Email: jyang1@usi.edu

Abstract

Using a sample of mergers and acquisitions (M&As) from

26 countries over 2000–2018, we find that domestic insti-

tutional investors facilitate both domestic and cross-border

M&As. The facilitation effect is more pronounced for

domestic than cross-border M&As. When the acquirer

country has greater financial freedom or better investor

protection than the target country, domestic institutional

investors facilitate cross-border M&As more effectively. As

Ordinary Least Squares regressions are not the best

approach regarding cross-border M&As, we confirm that

the main results are robust to Zero-inflated Poisson regres-

sions. Foreign institutional investors' influence on cross-

border M&As is stronger when the sample excludes the

United States.

KEYWORDS

cross-border mergers and acquisitions (M&As), foreign

institutional ownership, domestic institutional ownership,

financial freedom, Zero-inflated Poisson regression

JEL CLASSIFICATION

G15, G23, G34

1|INTRODUCTION

Cross-border mergers and acquisitions (M&As) can be a springboard to help firms expand their business into foreign

countries in an increasingly competitive global market. According to the United Nations Conference on Trade and

Development, the total value of cross-border M&As accounts for 40% of the foreign direct investment amount

Received: 6 July 2019 Revised: 22 September 2022 Accepted: 9 January 2023

DOI: 10.1111/irfi.12409

© 2023 International Review of Finance Ltd.

International Review of Finance. 2023;23:553–583. wileyonlinelibrary.com/journal/irfi 553

worldwide between 2000 and 2018. Ferreira et al. (2010) find that foreign institutional investors facilitated cross-

border M&As from 2000 to 2005. Using a sample of cross-border M&As from 26 countries over the 2000–2018

period, we find that foreign institutional ownership approximately doubles from 2000 to 2018, while the number of

cross-border M&As does not increase during the same period. Has the role of institutional investors in cross-border

M&As changed? In this study, we re-examine foreign and domestic institutional investors' role in cross-border

M&As.

First, we attempt to address potential estimation problems caused by the excessive zeros in the dependent vari-

able for both country-level regressions and country-pair regressions of cross-border M&As. Because cross-border

M&As do not occur between any two countries every year, the annual number of cross-border M&As between any

two countries is often zero. Specifically, based on our sample, the number of cross-border M&As is zero for about

13%–24% of the country-year observations in country-level regressions and 90%–91% of the country-pair-year

observations in country-pair regressions. This is typical in studies on the determinants of the intensity or volume of

cross-border M&As. Ordinary Least Squares (OLS) and Tobit regressions have been used in these studies (e.g., Erel

et al., 2012; Ferreira et al., 2010; Rossi & Volpin, 2004). However, due to the potential heteroskedasticity and non-

normality of the errors, both OLS and Tobit estimates are likely to be biased and inconsistent, and the standard

errors of the estimates may be unreliable (Wooldridge, 2002). If a separate process generates these excessive zeros,

they need to be modeled independently for better estimates.

We conduct goodness-of-fit tests and find that Zero-inflated Poisson (ZIP) model can address the problem of

excessive zeros better than other models, such as Tobit or OLS regressions. We present OLS regression results to

compare with the results in previous studies. We also report ZIP regression results as robustness checks. Overall, the

main results from OLS regressions are qualitatively similar to those from ZIP regressions. Given that OLS regressions

are much easier to estimate than ZIP regressions, our results suggest that OLS regressions may be a practical choice

for cross-border M&As, even with excessive zeros in the dependent variable.

Second, we find that domestic institutional investors facilitate both domestic and cross-border M&As. Further-

more, domestic institutional investors facilitate domestic M&As more effectively than cross-border M&As, which

explains the finding of Ferreira et al. (2010) that domestic institutional ownership is inversely related to the intensity

of international takeovers. Specifically, Ferreira et al. (2010) measure the intensity of cross-border M&A activity as

the ratio of the cross-border M&As to all M&As, where all M&As include both cross-border and domestic M&As.

Therefore, the fact that domestic institutional investors facilitate domestic M&As more effectively than cross-border

deals can lead to a negative correlation between domestic institutional ownership and the ratio of the cross-border

M&As to all M&As. Using alternative ratios to measure the cross-border M&A activity, we are able to disentangle

this relationship and explain the finding in Ferreira et al. (2010). Our results are robust to controlling for the potential

endogeneity of institutional ownership, using the fractional response regression, and including both completed and

withdrawn M&A deals in the sample.

Third, we find that domestic institutional investors can facilitate cross-border M&As more effectively when the

acquirer country has greater financial freedom or better investor protection than the target country. This finding

highlights how cross-border M&As can benefit target firms in countries without sufficient financial freedom or inves-

tor protection. For example, in a country with less financial freedom, more government interferences hinder local

firms from funding investment projects, limiting business expansion, and corporate profits. However, cross-border

M&As can help local firms overcome this problem.

Last, we find a stronger positive impact of foreign institutional investors on cross-border M&As after excluding

the United States from the sample. The results are robust to alternative ways of excluding M&As that involve the

United States.

Our study makes three contributions. First, among the large-sample studies of cross-border M&As, we are the

first to use ZIP regressions to address potential regression estimation issues due to excessive zeros inthe dependent

variable; we are also the first to employ the two-stage control function approach to address the potential endo-

geneity of institutional ownership in nonlinear models.

554 YANG ET AL.