Spatial Geography and Control in Foreign Acquisitions

Journal of International Business Studies, Forthcoming

42 Pages Posted: 22 Aug 2013

See all articles by Shavin Malhotra

Shavin Malhotra

Ryerson University - Ted Rogers School of Management

Ajai Gaur

Rutgers Business School - Newark and New Brunswick

Date Written: August 20, 2013

Abstract

This article examines how spatial geography influences firms’ choice of control in cross-border acquisitions (CBAs). Building our arguments on the information asymmetry in CBAs, we argue that geographic distance affects adverse selection and moral hazard problems in CBAs. Geographic distance hinders acquirers’ efforts to assess the true value of the target firm, prompting them to opt for a partial control. At the same time, geographic distance hampers acquirers’ ability to manage contractual relationships and integrate target firms, prompting them to opt for a full control. We argue that the cost and benefit tradeoff of full versus partial ownership vary at different levels of geographic distance. Accordingly, we propose a curvilinear, U-shaped relationship between geographic distance and equity ownership. This relationship is contingent on acquisition relatedness and the listing status of the acquirer (public versus private). As the geographic distance between acquirer and target increases, acquirers assume higher equity stakes in related compared with unrelated acquisitions. At greater geographic distances, public firms acquire more equity ownership than do private firms. Findings from 10,181 deals across 52 acquiring and 61 target countries provide robust support for these arguments.

Suggested Citation

Malhotra, Shavin and Gaur, Ajai S., Spatial Geography and Control in Foreign Acquisitions (August 20, 2013). Journal of International Business Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2313415

Shavin Malhotra

Ryerson University - Ted Rogers School of Management ( email )

350 Victoria Street
Toronto, Ontario M5B 2K3
Canada

Ajai S. Gaur (Contact Author)

Rutgers Business School - Newark and New Brunswick ( email )

Newark, NJ
United States

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