Financial Risk and Cross-border M&A

This paper assesses the question of how a host country’s financial risk influences cross-border Merger and Acquisition (M&A). We use bilateral flows of cross-border M&A from 20 major Organization for Economic Cooperation and Development (OECD) countries to 135 developed and developing countries for the period 1995-2012. Utilizing a partial adjustment model that includes the initial levels of and differences in explanatory variables, we investigate the long-term vs. short-term effects of financial risk on cross-border M&A. We also employ the Heckman sample selection model to assess the long-term vs. short-term effects of financial risk on two different stages of cross-border M&A (i.e., selection stage vs. outcome stage). We find that financial risk is quite different from political risk, with regards to its association with cross-border M&A. Specifically, while higher political risk in developing countries is associated with lower cross-border M&A sales, higher financial risk of host countries, particularly of developing countries, is associated with greater M&A sales, not only in the short term but also in the long term. Among the various components comprising financial risk, exchange rate instability, debt service as % of exports, current account as % of GDP, and international liquidity are found to be significant where the host country is a developing country.