The Regulatory Environment, Level of Entry and International Acquisitions of Financial Firms

Abstract

This study presents evidence on the influence of the regulatory environment of host and home countries, on firm value, when the firm announces a foreign acquisition. The study analyzes the valuation effects on financial firms, based on the returns to shareholders of 120 bidders from 13 home countries acquiring across 20 host countries. Bidder shareholders lose significantly when entering "open" markets for the first time, but gain significantly when making initial and subsequent entries into "restricted" markets. This implies that markets perceive monopoly rents to outweigh learning costs associated with initial entries but diversification benefits are inadequate in outweighing learning costs. The evidence is consistent with the notion that regulations in both host and home countries should be endogenous to FDI decisions. The influence of the tax environment and exchange rates was also examined, but only the former was found to be a significant factor in affecting bidder returns.

JEL Classification: F30, F23, F38