Wealth Effect For U.S. Acquirers From Foreign Direct Investments

This study investigates the wealth effects of foreign direct investments on U.S. firms during the period of 1989-2000. Overall findings indicate that U.S. acquirers experience statistically significant wealth gains of 0.57 percent around the announcement of acquisitions. The wealth effects do vary with location of target firms and acquirers' industry affiliation. Acquisitions in Europe yield significant positive wealth gains while acquisitions in Asia/Pacific, North America, and Latin/Central America regions yield negative wealth gains. The highest wealth gains to U.S. acquirers occur when they acquire targets in France followed by acquisitions in the U.K. Canadian acquisitions, on the other hand, yield negative significant wealth gains. The highest wealth gains are also observed in the services industry followed by acquisitions in the manufacturing and food industries. Acquisitions in mining/extraction, paper products, and communications sectors, on the other hand, yield statistically significant negative wealth gains to acquirers. Introduction The U.S. foreign direct investment (FDI) has increased to $66 billion in 2000 from $33 billion in 1994. Europe and Latin America are the largest recipients of the U.S. foreign investments. There are studies (i.e. Zhang, 2001; and Ramirez, 2002) investigating the determinants of foreign direct investment at the macro level by using real GDP, the real exchange rate, and political factors. Foreign direct investment in the form of mergers and acquisitions (MA Dennis and McConnell, 1986; Dodd, 1980; and Asquith and Kim, 1982). Cross-border acquisitions can provide benefits to acquiring firms that might not be fully realized by their shareholders through cross-country portfolio diversification. Therefore, cross-border acquisitions may increase the value of a firm. These benefits arise from firms' greater ability to use their strategic advantages in international financial and product markets, which result from differences in such items as tax structures, markets for corporate control, government regulations, and technology. For example, Manzon, Sharp, and Travlos (1994) show that U.S. multinationals derive incremental benefits through foreign acquisitions by using their international financial networks to selectively repatriate dividends in a tax-beneficial manner. Heston and Rouwenhorst (1994) find that diversification across countries within an industry is a much more effective tool for risk reduction than industry diversification within a country. Several studies have investigated the wealth gains in international acquisitions. Among them, Vasconcellos, Madura, and Kish (1990) and Connell and Conn (1993) examine the mergers between U.S. and the U.K. firms; Kang (1993) and Pettway, Sicherman, and Spiess (1993) focus on mergers between U.S. and Japanese firms. Fatemi (1984) and Doukas and Travlos (1988) probe U.S. firms engaged in foreign acquisitions. Harris and Ravenscraft (1991) and Cebenoyan, Papaioannou, and Travlos (1992) investigate U.S. targets of foreign firms. Dewenter (1995) compares the wealth effects of U.S. targets (chemical and retail industries) of domestic acquirers versus those of foreign acquirers. Cakici, Hessel, and Tandon (1996) and Kiymaz and Mukherjee (2000) show that country diversification plays an important role in determining wealth gains to merger participants. …