Shareholder wealth effects of cultural diversity among blockholders: Evidence from cross‐border acquisitions by U.S.‐listed companies

• Author: Victor Zitian Chen
• DOI: http://doi.org/10.1111/corg.12273
• Published date: 01 May 2019
• Date: 01 May 2019

ORIGINAL ARTICLE

Shareholder wealth effects of cultural diversity

among blockholders: Evidence from cross‐border acquisitions

by U.S.‐listed companies

Victor Zitian Chen

Belk College of Business, University of North

Carolina at Charlotte, Charlotte, North

Carolina

Correspondence

Victor Zitian Chen, Belk College of Business,

University of North Carolina at Charlotte,

9201 University City Blvd, Charlotte, NC

28223 USA.

Email: zchen23@uncc.edu

Abstract

Research question/issue: This paper studies whether and how diversity among

blockholders in their cultural preferences may affect short‐term shareholder wealth.

Blockholders often hold diverse objectives, leading to principal–principal (PP)

conflicts in cross‐border acquisitions (CBAs). The literature, however, is unclear on

whether they have diverse cultural preferences when it comes to the location choice

in CBAs and, if so, how such diversity affects short‐term shareholder wealth surround-

ing the announcement of a CBA. Integrating agency and resource dependence per-

spectives, this paper argues that such diversity has an inverted U‐shaped relationship

with shareholder wealth.

Research findings/insights: The theory is tested using a sample of 2,571 nonfinan-

cial CBAs made by U.S.‐listed companies between 2002 and 2014. Results suggest an

inverted U‐shaped relationship between diversity in host‐market cultural distance

propensities among five types of blockholders (family, corporations, bank and insur-

ance companies, resistant financial institutions, and government) and the cumulative

abnormal returns (CARs) attributable to CBA announcements.

Theoretical/academic implications: First, international corporate governance

scholars should understand the nonfinancial motivations of shareholders when eval-

uating potential conflicts in internationalization strategy and performance. Second,

future studies should recognize that PP issues in the multinational firm are a multidi-

mensional construct, composed of multiple sources of conflicts beyond the traditional

focus on controlling‐versus‐minority shareholders. Lastly, the PP literature should

shift its rhetoric from conflicts to a good balance between benefits and conflicts,

depending on the degree of heterogeneity among principals.

Practitioner/policy implications: An optimal ownership structure may involve mod-

erate diversity among blockholders in their nonfinancial preferences. This optimal level

should bring in diverse resources and perspectives from different blockholders, while

keeping coordinating costs moderate for aligning different goals of these blockholders.

KEYWORDS

Corporate governance, blockholder ownership, cross‐border ownership, firm‐level governance

outcomes, ownership mechanisms, shareholder value

Received: 11 December 2017 Revised: 3 February 2019 Accepted: 5 February 2019

DOI: 10.1111/corg.12273

186 © 2019 John Wiley & Sons Ltd Corp Govern Int Rev. 2019;27:186–209.wileyonlinelibrary.com/journal/corg

1|INTRODUCTION

There is an emerging literature in corporate governance on principal–

principal (PP) conflicts, built often on a dichotomous trade‐off between

financial objectives (e.g., shareholder wealth) and nonfinancial prefer-

ences (e.g., private benefits of control; V. Z. Chen, Hobdari, & Zhang,

2018; V. Z. Chen, Musacchio, & Li, 2018; Y. Y. Chen & Young, 2010;

Dharwadkar, George, & Brandes, 2000; Li & Qian, 2013; Sauerwald

& Peng, 2013; Young, Peng, Ahlstrom, Bruton, & Jiang, 2008). Yet little

is known about the consequences of PP conflicts within the domain of

nonfinancial preferences. This study fills this gap by analyzing and

empirically testing the effects of diversity (i.e., the degree of differ-

ences) in foreign cultural preferences among major blockholder types

on shareholder wealth surrounding the announcement of cross‐border

acquisitions (CBAs). This focus reflects the real business environment

where corporations are often owned by multiple types of powerful

blockholders (Attig, Guedhami, & Mishra, 2008; Barroso Casado,

Burkert, Dávila, & Oyon, 2016; Edmans & Holderness, 2017; Edmans

& Manso, 2011; Maury & Pajuste, 2005) who may have different

and often conflicting nonfinancial preferences regarding a firm's stra-

tegic investments, such as CBAs (e.g., V. Z. Chen, Hobdari, & Zhang,

2018; Connelly, Hoskisson, Tihanyi, & Certo, 2010; Connelly, T ihanyi,

Certo, & Hitt, 2010; Dam & Scholtens, 2012; Hoskisson, Hitt, Johnson,

& Grossman, 2002; Munari, Oriani, & Sobrero, 2010).

This paper investigates shareholder wealth effects of the diversity

of nonfinancial preferences, focusing on cultural preferences, among

coexisting blockholder groups. Although the literature is rather vague,

a blockholder is typically defined as a shareholder who holds a signifi-

cant amount of a firm's shares (e.g., greater than 5% of voting shares,

the legally mandated threshold in the United States to report publicly;

Edmans & Holderness, 2017). Theoretically, taking into account the

dual roles of blockholders as both resource providers and monitors, this

study integrates e predictions from both resource dependence theory

(RDT) and agency theory (AT). Diversity in cultural preferences may

generate initially positive effects on shareholder wealth because it cre-

ates value from diverse perspectives and resources and, thus, creativ-

ity. Such effects, however, occur only up to a certain point, after

which too much diversity creates irreconcilable PP conflicts and, thus,

agency costs for coordination, ultimately reducing shareholder wealth.

A major empirical challenge is that nonfinancial preferences cannot

be directly observed and measured because they are often unverifi-

able (Dyck & Zingales, 2004). They can only be revealed through a

firm's actual strategic behaviors (Fiss & Zajac, 2004; Miller, Breton‐

Miller, & Lester, 2011). For instance, management scholars have found

that ownership by different types of shareholders is related to firm

strategies that deviate from shareholder value orientations (Fiss &

Zajac, 2004; Meyer & Höllerer, 2010), growth investments (Greve &

Zhang, 2017; Miller et al., 2011; Zhou, Gao, & Zhao, 2017), and

employment downsizing (Greenwood, Díaz, Li, & Lorente, 2010). Yet

these efforts tend to limit analysis to a dichotomous view of

financial‐versus‐nonfinancial (or more‐vs.‐less financial) orientations;

hence, researchers may have overlooked the possible diversity among

shareholders within the domain of nonfinancial preferences.

CBAs offer a unique setting to reveal a firm's nonfinancial prefer-

ences and are attributable to shareholder wealth effects. First, by

expanding across national cultures, like other international expansion

strategies, CBAs reveal a firm's location choice and, thus, variations

in its acceptance of new social environments. Controlling for financial

and economic variables, findings show that differences in social envi-

ronments, such as cultural distance, may indicate the comfort zone

relating to a firm's nonfinancial preferences. Second, unlike many

other international expansions, such as Greenfield investments or

exports, CBAs have typically a clear and short time window

(e.g., a clear date of announcement). Thus, shareholder wealth

effects can be attributed to factors associated with CBAs in an event

study (Bonaime, Gulen, & Ion, 2018; V. Z. Chen, Hobdari, & Zhang,

2018; Cuypers, Cuypers, & Martin, 2017). Lastly, CBAs often involve

large amounts of investments and may change corporate finance

structures, inducing major shareholders to actively intervene in the

decision process (Becht, Polo, & Rossi, 2016). Thus, the final decision

of a CBA is attributable to a firm's ownership structure, such as type

of blockholders.

If blockholder identities lead to different cultural preferences of a

foreign investor, then we should expect to observe different relation-

ships between blockholder structures and cultural distance as mea-

sured between the home and the host markets in CBAs. The existing

literature has yet to offer any evidence on this relationship, because

national cultural distance is mostly considered an exogenous factor

that is independent of location choice (Steel & Taras, 2010) as a cause

or a moderator, rather than an effect (for reviews, see Kirkman, Lowe,

& Gibson, 2006; Kirkman, Lowe, & Gibson, 2017; Stahl & Voigt, 2008;

Taras, Kirkman, & Steel, 2010).

Based on an event study of 2,571 CBAs initiated by 832 U.S.‐listed

firms into 33 host markets between 2002 and 2014, empirical analysis

supports an inverted U‐shaped relationship between cultural diversity

among blockholders and cumulative abnormal returns (CARs) within

±2 days around the announcement of the acquisition, an indicator

for short‐term shareholder wealth. The United States represents an

ideal market for the theory, because its effective internal and external

control enables the use of voting shares to influence strategic deci-

sions; shareholders (except banks and insurance companies) are active;

and a large number of companies are actively undertaking CBAs.

This study seeks to make multiple contributions to the understand-

ing of ownership structure of the multinational firm, a research gap in

international corporate governance until only recently (e.g., Aguilera &

Jackson, 2010; Filatotchev, Poulsen, & Bell, 2018). In particular, it

responds to the recent call for greater understanding of the roles of

corporate ownership structure in a firm's internationalization strategy

and performance (e.g., Filatotchev et al., 2018). First, this study adds

values to the emerging but still sparse literature on how PP conflicts

affect a firm's internationalization strategy (e.g., V. Z. Chen, Hobdari,

& Zhang, 2018; V. Z. Chen, Musacchio, & Li, 2018; Y. Y. Chen &

Young, 2010). Following V. Z. Chen, Hobdari, and Zhang (2018) and

V. Z. Chen, Musacchio, and Li (2018), this study is one of few that

focuses on the acquiring firms' PP conflicts among blockholders,

whereas others focus on powerful (e.g., controlling) versus minority

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