Hybrid Leviathans Overseas: Government-Private Shareholder Conflicts in Cross-Border Acquisitions
2016 Academy of Management Meeting Best Paper Proceedings, Forthcoming
6 Pages Posted: 2 May 2016 Last revised: 4 Aug 2016
Date Written: April 29, 2016
The principal-principal (PP) perspective focuses on the problem that “[large] investors may represent their own interests, which need not coincide with the interests of other investors in the firm” (Shleifer & Vishny, 1997). This type of PP conflicts typically arise because controlling shareholders may use their control power to abuse the rights of other shareholders in order to obtain private benefits of control (Young, Peng, Ahlstrom, Bruton, & Jiang, 2008). Studies also show that such conflicts tend to be aggravated when there are other large shareholders with the capacity to contest control and, thus, serve as a balance to the power of the controlling shareholder (Li & Qian, 2013).
This traditional view of PP conflicts has primarily focused on one particular PP conflict, in which a controlling shareholder runs the firm to obtain private benefits of control (Young et al., 2008). In contrast, we contribute to this literature by adding another important type of conflict prevalent in thousands of firms worldwide, namely the potential contest between government shareholders and private shareholders. This conflict arises because of the fundamental conflicts between public/political and private interests that separate these two types of investors. More importantly, we do not know how this type-based PP conflicts play out in the context of important strategic decisions of the firm such as cross-border acquisitions.
This study, therefore, focuses on PP conflicts between the government- and private shareholders in the context of cross-border acquisitions. In particular, we study whether and how the conflicts between government- and private shareholders affect the size and the premium of such acquisitions. This is an appropriate setting to study PP conflicts because the size and the premium of cross-border acquisitions affect not only the complexity and operational risk of a firm (Mantecon, 2009; Seth, Song, & Pettit, 2002; Tufano, 1996), but can also offer a chance for influential shareholders to manipulate corporate funds to destroy value for other shareholders (Bris & Cabolis, 2008). The controlling shareholder or the controlling group of shareholders of the acquirer firms can obtain pecuniary and non-pecuniary benefits from such cross-border transactions, such as diversifying the assets of their portfolio of firms at the expense of the acquiring firm performance, securing access to resources for related firms, increasing their international reputation, or simply bringing political benefits to these controlling shareholders (Chen & Young, 2010; Young et al., 2008).
In contrast with the current literature on PP conflict, which focuses only on the conflicts between large and small shareholders, we argue that there is a potential contest between government and private shareholders as two contestant groups in large-scale, cross-border acquisitions. We examine the role of governments as shareholders because they have, more often than not, interests that clash with those of private investors due to the fundamental conflict between political/public and private interests (Boardman & Vining, 1989; Inoue, Lazzarini, & Musacchio, 2013; Musacchio & Lazzarini, 2014; Vining & Weimer, 2015). The literature on state-owned MNEs (SOMNEs) argues that these firms often internationalize with diplomatic and political objectives in mind (Cuervo-Cazurra, Inkpen, Musacchio, & Ramaswamy, 2014; Cui & Jiang, 2009, 2012; Dau, 2012); frequently overpaying for projects or target firms (Bass & Chakrabarty, 2014); and taking on more risk than their private counterparts (Ramasamy, Yeung, & Laforet, 2012). These works, however, take for granted that the internationalization decisions were made following the whim of governments (as a controlling shareholders), ignoring any tensions or opposition from private shareholders. Furthermore, government ownership varies significantly, from full, to majority, to minority ownership across SOMNEs (Inoue et al., 2013; Musacchio & Lazzarini, 2014), causing different PP conflicts with the private shareholders (Vining & Weimer, 2015).
Keywords: State-owned enterprise, privatization, acquisitions, FDI, cross-border
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