The Effect of Global Diversification on Long-Term Acquiring Firm Valuation

The Effect of Global Diversification on Long-Term Acquiring Firm Valuation Eric C. Tsai, Assistant Professor of Finance, State University of New York, Oswego, USA ABSTRACT It is almost a consensus in the M&A literature that domestic mergers and acquisitions destroy acquiring firm value upon the announcement, but the seemingly unresolved issue is the acquirers long-term post-merger performance, although many studies find negative wealth effect in the long run. Little research, however, is done on the long-term performance of bidding firm in international M&A. This paper, consequently, takes the initiative to examine whether acquirers in foreign M&A also experience the long-term post-acquisition underperformance phenomenon. Even though cross-border M&A creates enormous announcement wealth effect for the acquiring firms during the latest merger wave, the gain evaporates very quickly and a multiple-year underperforming period follows. The sharp contrast between the announcement wealth effect and the long-term underperformance is consistent with the notion that, at the time of announcement, investors may be too optimistic toward the potential global diversification gains which may take significant amount of time to consummate or may never will. Keywords: international mergers and acquisitions, long-term performance, shareholder wealth, wealth effect, corporate valuation, international corporate diversification, global diversification [JEL code: G3, F2] INTRODUCTION Firm valuation following major corporate events has always been closely scrutinized. Among them, the corporate wealth effect associated with mergers and acquisitions (M&A) is one of the most intriguing valuation issues in finance. Nonetheless, the proliferation of the M&A studies following the major merger waves in the 1980s and 1990s does not necessarily provide conclusive evidence in some critical areas of this issue. Some clear patterns from the research, however, do provide better understanding on corporate M&A behaviors and their consequences. At the center of the issue clearly is whether mergers and acquisitions create value for shareholders. If a positive shareholder wealth effect could not be verified as a consequence of M&A activities, it is not consistent with the goal of financial management given the drastic increase of M&A activities in recent decades. After all, the lack of firm value gain would suggest corporate diversification decisions ill-conceived and poorly implemented. It is well documented in the literature that mergers and acquisitions do not necessarily create value for shareholders (e.g., the survey of recent M&A literature by Martin and Sayrak (2003)). It is attributed to factors such as the presence of agency costs, operational inefficiency, and ineffective integration. Martin and Sayrak (2003) group latest studies at the corporate level into two categories. The cross-sectional research on the link between M&A and shareholder wealth gain generally indicates a firm value discount owning to corporate diversification. The other group of the longitudinal studies of patterns in corporate diversification through time tends to show a downward trend. It is worth noted, though, that diversification discount are mostly found on the acquirers while the targets tend to enjoy sizable firm value gain. It is logical to interpret that acquirers tend to aim at undervalued firms and the market responds accordingly toward the targets. However, it is less clear and somewhat puzzling why the value gain does not transfer to the acquirers and why the acquirers ability in recognizing undervalued targets is not well-perceived by the market. Consequently, transaction characteristics are closely examined (e.g., payments methods, successful versus unsuccessful bids, glamour versus value acquirers, geographic versus industrial diversification, mergers versus tender offers, and lately the research methodology itself, among others). Nonetheless, there do not seem to emerge conclusive reasons for the acquirers lackluster wealth effect associated with their corporate diversification.

On the other hand, despite the intensive research on M&A activities, the focus is primarily on bidders acquiring domestic targets. International Business theories suggest that acquirers in international M&A tend to realize more diversification benefits and thus better firm value gains through globalization. The relatively sporadic international M&A studies do reveal more favorable wealth effect for the bidders. Nonetheless, a significant and positive wealth gain for cross-border acquirers is neither ubiquitous nor prevailing. Certainly, the acquiring firm valuation issue is no more resolved in international diversification area and many questions are left unanswered. The M&A literature also consists of studies focusing more on the immediate announcement wealth effect. The announcement wealth effect, however, can be short-lived if setbacks occur in the lengthy process of integrating the targets and improving operating efficiency that hinder the realization of diversification benefits. The long-term performance of the acquiring firms obviously should not be taken lightly. This paper intends to address the two less researched areas, the international M&A and the acquirers long-term post-merger performance. In fact, the impact of cross-border diversification on acquirers long-term firm valuation has not yet been fully investigated. In addition, the nature of the global geographic diversification indicates the importance of examining the link between the long-term wealth effect and the choice of target location and countries. It should then shed light on whether international diversification follows the pattern of domestic M&A for the acquirers which show substantial long-term underperformance after acquisitions. The remainder of this paper is organized as follows. The next section reviews relevant work in the literature concerning acquiring firm long-run post-merger performance. Section III discusses the data sources and estimating methodologies. The empirical results and their interpretations are presented in Section IV. Section V summarizes the main findings of this paper. LITERATURE REVIEW The related work in the literature regarding long-term post-acquisition bidding firm valuation is reviewed first in this section and then the relevant literature concerning international M&A will also be addressed. The prevailing U.S. evidence has shown that there is normally significant target firm value increase upon M&A announcement while the value gain for their acquirers is ambiguous at best, commonly negative, insignificant, or merely small positive (see literature review by Weston, Cheung, and Sin (2001)). The evidence on the less researched long-run post-merger acquiring firm performance remains just as inconclusive. Furthermore, the acquirers do not seem to fare better over the long-run. Table 1 summarizes the domestic M&A studies on long-run wealth effects for U.S. acquirers and their results are mixed. About half of these studies find significant declines in share returns over long-term event windows. However, almost an equal number of findings show insignificant negative results. Only very few exceptions exhibit significant positive long-term performance for acquirers. In particular, more recent studies do not seem to indicate a reversal of such dismal long-term performance by acquiring firms after their corporate diversification but new explanations are offered. For instance, Doukas and Petmezas (2007) find mostly negative long-run stock returns for acquirers from one to three calendar years after their acquisitions. It is attributed to the managerial overconfidence. Specifically, not only do overconfident bidders realize lower announcement wealth gain than rational bidders but also exhibit poor long-term performance. Five or more deals within a three-year period are associated with lower wealth effects than the very first deals. Managers appear to attribute the initial success to their own capability and thus become overconfident and engage in more M&A deals leading to subsequent poor performance. By examining newly public firms, within a year of their IPO, Wiggenhorn, Gleason, and Madura (2007) report negative stock returns, although not significant, for acquirers up to 24 months after their acquisitions compared to those not making any acquisition.

Table 1: Summary of Long-Term Wealth Effects for U.S. Acquirers in Recent Domestic M&A Studies This table summarizes long-term post-acquisition stock returns for U.S. acquiring firms over the selected event windows from studies on domestic mergers and acquisitions in the U.S. Study Doukas and Petmezas (2007) Wiggenhorn, Gleason, and Madura (2007) Megginson, Morgan, and Nail (2004) Rau and Vermaelen (1998) Loughran and Vijh (1997) Agrawal,Jaffe, and Mandekler (1992) Loderer and Martin (1998) Franks, Harris, and Titman (1991) Magenheim and Mueller (1988) Bradley, Desai and Kim (1983) Dodd and Ruback (1977) Asquith (1983) Malatesta (1983) Post-Acquisition Return 0.93% a 1.42% 0.26% 1.72% 0.36% b 0.06% 0.32% 0.58% 2.58; 9.86; 9.86% c 2.38; 1.89; 3.11% 8.61; 19.6; 18.5% 4.04% +8.85% 0.10% 14.20% +61.30% Event Window Sample Size 3 Years 2,986 1,180 199 592 6 Months 12 Months 18 Months 24 Months 277 277 277 277 Year 1; 2; 3 204 112 92 (0,36) Month 2,823 316 (1,1250) 534 434 100 Post-acquisition stock return is measured as cumulative abnormal return (CAR) unless noted otherwise. Significant CARs or postacquisitions returns at the 10%-level or better are in bold. Cumulative abnormal return per month is shown if CAR over the event interval is not available. Event window is (beginning event day, ending event day). If noted month, it shows beginning and ending event month. Otherwise, it is indicated by the number of months or years. Sample Period 1980 2002 1992 2001 1977 1996 1980 1991 1970 1989 Megginson, Morgan, and Nail (2004) also find negative wealth effects across the board in announcement abnormal return (AR), year 1, year 2, and year 3 buy and hold abnormal return (BHAR) for acquirers and that the longterm performance is associated with corporate focus. Specifically, 3 years after merger, focus-decreasing mergers lead to significantly negative long-term performance, such as the average of 18% loss in stockholder wealth, 9% loss in firm Focus Single acquirers Multiple acquirers Multiple acquirers 1 st deals Multiple acquirers higher-order deals ( a Based on Fama-French 3-factor model) Newly public firms ( b AAR: Monthly Average Abnormal Return) Full Sample Focus Preserving or Increasing (FPI) Focus Decreasing (FD) ( c BHAR: Buy & Hold Abnormal Return) Mergers Tender offers Full Sample Mergers Tender offers 10.26% (0,1250) 765 1955 1987 Mergers (5-year post-merger returns) +1.50% (0,1250) 1,298 1966 1986 Mergers and tender offers (5-year postmerger returns) 0.11% (per month) 42.20% 49.09% 27.34% (0,36) Month ( 3,36) Month 346 1975 1984 Mergers and tender offers 78 78 78 1976 1981 Full Sample Mergers Tender offers 7.85% (0,365) 94 1962 1980 Unsuccessful tender offer bids 1.32% 1.60% 7.20% 9.60% 2.90% 13.70% 7.70% (0,365) 124 48 (0,240) 196 89 (0,365) 121 75 59 1958 1978 1962 1976 1969 1974 1971 1974 1969 1974 Successful tender offer bids Unsuccessful tender offer bids Successful mergers Unsuccessful mergers Full Sample Subsample after 1970 Small Bidders Langetieg (1978) 6.59% (0,365) 149 1929 1969 Successful mergers Mandelker (1974) 1.32% (0,365) 241 1941 1963 Successful mergers

value, and significant declines in operating cash flows, while focus preserving or increasing mergers result in marginal improvements in long-term performance. The U.K. evidence in the literature is found to be similar to that of the U.S. For instance, using a sample of 519 acquisitions from 1983 to 1995, Sudarsanam and Mahate (2003) report +41 to +750 day buy and hold abnormal return (BHAR) ranging from 8.71% to 21.89% based on various benchmark models including market-, mean-, size- and MTBV-adjusted BHAR. They also find Value acquirers outperform glamour acquirers over the 3-year post-acquisition period. Glamour firms with overvalued equity are more likely to exploit their status by using it more often than cash to finance their acquisitions. Value acquirers tend to do the opposite with a greater use of cash in their transaction. Their findings are vastly consistent with those for the U.S. reported by Rau and Vermaelen (1998). As for the announcement wealth effect, it is well documented in the literature that acquirers tend to be the losers suffering firm value loss, when announcing the acquisition of domestic targets which, in contrast, often emerge as the winners enjoying shareholder wealth gain (e.g., Walker, 2000; Graham, Lemmon, and Wolf, 2002). On the other hand, the announcement wealth effect for the two sides in cross-border M&A may not be as different but acquiring firms tend to experience little or insignificant firm value gain. For instance, Doukas and Travlos (1988) find U.S. acquirers gain insignificant positive firm value on the acquisition announcements for the period of 1975-1983. However, Morck and Yeung (1992) discover modest but significant abnormal returns surrounding the event day for U.S. acquiring firms for 1978-1988. Datta and Puia (1995) report negative cumulative share returns for U.S. acquirers during 1978-1990, while Cakici, Hessel and Tandon (1996) fail to find any positive wealth effect for U.S. bidders for 1983-1992. Seth, Song and Pettit (2000) report small positive, statistically insignificant gains for acquiring U.S. firms during the period of 1981-1990. Amihud, DeLong and Saunders (2002) report significantly negative abnormal returns to acquirers for cross-border bank mergers during 1985-1998. Kiymaz (2003) presents a finding of moderate but significant wealth gain for U.S. acquirers during the period of 1989-2000. Moeller and Schlingemann (2005) find that international acquisitions trade at a discount during the period of 1985-1995. DATA AND METHODOLOGY The standard event study procedure is used to measure the market-based wealth effects on a sample of 369 U.S. corporations acquiring foreign targets between 1992 and 2000. Stock prices and other variables are retrieved from CRSP, the Standard and Poor s CompuStat North America, PDE, and ExecuComp datasets as well as Compact Disclosure CDs. The full sample is formed by first including all U.S. firms conducting international mergers and acquisitions, as listed in Mergers and Acquisitions, in the initial sample over the period from 1992 to 2000. We then exclude any partial acquisitions, cleanups, or increasing stakes of previous partial acquisitions. The event date, t = 0, is the date when the news of international acquisitions first appears in the Wall Street Journal. Given the publication lag of one day, this means that t = 1 is the day when the firm actually makes an announcement. The acquisition cases not reported in the Wall Street Journal are eliminated from the sample. To ensure a clean sample, free from any confounding effects, acquirers with any major concurrent corporate event occurring within the 15-day period prior to the acquisition announcement also are excluded. The Wall Street Journal Index is again consulted for this purpose. Finally, the remaining acquisitions will be retained only if stock prices for the acquirers are available on CRSP tapes. The final sample consists of a total of 369 U.S. acquisitions overseas completed over the period of 1992 2000. Table 2 provides a brief descriptive statistics for the sample. Table 2: Descriptive Sample Statistics International M&As by U.S. Firms: Number of Cases by Year, Country/Region, and Industry Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 Total Frequency 37 28 37 34 42 42 62 59 28 369 Country/Region Asia Africa Canada Central/ South UK Western Eastern Australia/ New Total America Europe Europe Zealand Frequency 15 3 54 35 115 116 15 16 369

Two-Digit SIC 01-10- 20-30- 40-50- 60-70- 80-99 Total 09 19 29 39 49 59 69 79 89 Frequency 1 16 83 117 31 27 24 57 11 2 369 This study follows the standard event method and uses the U.S. market index in calculating abnormal returns of U.S. acquiring firms. Firm i's abnormal return on each trading day t, (AR it ) is measured by: AR R a b R, (1) it it i where R it is stock i's daily return and R mt is the return on the equally weighted U.S. market index from the Center for Research in Security Prices (CRSP). The market model parameters, a i and b i, are estimated by regressing each firm s returns on the market returns over a 200-day interval starting from the 260 th to 61 st trading day prior to announcement at day 0. The daily average abnormal return (AR t ) for each day t for the entire sample of N firms is calculated by: N 1 ARt AR it N i 1 i mt. (2) For the purpose of calculating Z-statistics, the average standardized abnormal return (ASAR it ) is computed first as: 1 N AR ASAR it t N i 1 Sit. (3) S it is the estimated standard deviation for firm i, obtained by: 1 2 2 2 1 R R S 1 mt m it S i L L 2 R R mk m k 1 (4) where S 2 is the residual variance for stock i from the market model regression, L is the number of observations during the estimation period, R mk is the return on the market portfolio for the k th day of the estimation period, R mt is the return on the market portfolio for day t, and R m is the average return of the market portfolio over the estimation period. The Z-statistics are calculated as: Z, (5) t N ASAR t t 1, t2 N t2 ASAR t t2 t1 1 t1 Z. (6) Z t is used to test whether the average standardized abnormal return is equal to zero, while average cumulative standardized abnormal return over the interval t 1 and t 2 is equal to zero. Z t 1,t 2 tests whether the EMPIRICAL RESULTS Before reporting acquiring firms post-merger long-term performance, it is essential to first examine how the market responds to their foreign M&A announcements. Column 1 of Table 3 shows that the daily abnormal returns (AR) surrounding the announcement are significant at the 1%-level over day 1 and day 0, at 0.77% and 0.31%, respectively. Most existing studies have not been able to find significant announcement acquiring firm value gain (e.g., Doukas and Travlos, 1988). The handful of papers with significant gain report AR over the same two days in the range of 0.1% to 0.2% (e.g., Morck and Yeung, 1992; Markides and Oyon, 1998; Markides and Ittner, 1994; Kiymaz, 2003). Since the majority of these studies focus on international M&A in the 1970s and 1980s, my finding indicates that foreign M&A activities in the last decade appear to create substantial announcement wealth effect for the U.S. acquirers. This evidence is consistent with the assertion by Holmstrom and Kaplan (2001) that U.S. corporations have increasingly pursued more shareholder value friendly policies in the 1990s and hence raised investor s confidence regarding their international M&A decision.

The announcement wealth effects measured by cumulative abnormal returns (CAR) are also presented in Column 1 of Table 3. The typical two-day measure of CAR (-1,0), +1.08%, is high significance at the 1%-level. In comparison, most of the existing papers find insignificant results in CAR. The few exceptions report the much smaller CAR (-1, 0) in the order of 0.3% at the much lower significance (5% or 10%) level (e.g., Markides and Oyon, 1998; Markides and Ittner, 1994). However, more recent studies seem to obtain better results (e.g., 0.57% in Kiymaz, 2003). Again, the international M&A announcement wealth effect appears to be quite substantial during the latest merger wave, 1992-2000. The market seems to respond to the notion that strategic alliances such as foreign M&As enable firms to compete and perform better in the global economy of the 1990s. Since international mergers and acquisitions are location-oriented, it is also of interest to check whether announcement wealth effect varies with location choice, and later on to examine whether the wealth effect across different locations is preserved, increases, or evaporates in the long run. The results, based on the degree of country development, reported in Column 2 and 3 of Table 3, show that the market tends to respond more positively toward bidders acquiring targets in the developed countries. This result is consistent with the reverse-internalization hypothesis, as acquirers benefit from their targets know-how or technologies. Moreover, target firms in the developed countries are more likely to be compatible with U.S. firms, thus incurring lower cost of coordination, control and monitoring (Myerson (1982)). Consequently, the positive wealth effect for acquisitions in the developed countries reflects this advantage. In addition, developed countries as a group have a better legal tradition for investor protection than developing regions (La Porta, et. al., 1998). Furthermore, the greater degree of uncertainty and complexity associated with acquisitions in the less developed countries may also play an important role As for specific countries or regions, wealth effect may be affected by culture difference, legal system similarity, and geographic distance approximating factors such as information cost and global diversification. The last four columns of Table 3 reports little value gain for acquiring Canadian firms and only slightly better for bidding on non- U.K. European firms. However, acquiring firms in U.K. or other developed countries (e.g., Asian and Pacific) creates much more significant wealth effect. The non-existing gain in Canada may be due to geographic proximity and many acquisitions related to raw materials. The largest gain in acquisitions in Pacific and Asian developed countries possibly because greater geographic distance signals potentially greater international diversification benefits. Similarly, the modest gain in continental European countries is probably due to the moderate geographic distance and hence modest diversification benefits. For the U.K., the wealth effect is well above the average and is likely due to cultural or legal system similarity and language convenience. The relation between low cultural distance and high wealth effect is consistent with Datta and Puia (1995) and Duru and Reeb (2001). The results in Table 3 seem to suggest that investors prefer acquisitions in countries with lower cultural/legal system difference or greater geographic distance. Table 3: Announcement Wealth Effect of U.S. International Mergers and Acquisitions This table shows results for sample groups based on the location of target firms. The results for acquiring firms include daily average abnormal returns (AR) surrounding announcement day, and cumulative abnormal returns (CAR) and their corresponding Z-values (two-tail test) for specific time intervals based upon the standard event study methodology. Event Day/ Interval Full Sample (N=369) Degree of Development. Major Destinations. LDC (N=60) DC (N=309) Canada (N=54) U.K. (N=115) Non-U.K. Europe (N=116) Other DC (N=24) Daily Abnormal Return (%) AR ( 1) 0.7728*** 0.4102 0.8432*** 0.2985 1.1031*** 0.6599* 1.938*** (4.3363) (0.6692) (4.4438) (0.6632) (3.5495) (1.9571) (3.2420) AR (0) 0.3070*** 0.2960 0.3091*** 0.3818 0.3312*** 0.0679 1.0985 (2.7817) (-0.1404) (3.1017) (1.2403) (2.8516) (0.6274) (1.5211) AR (+1) -0.2493 0.2132-0.3392-0.5837-1.044*** 0.4044-0.1721 (-0.8158) (1.0694) (-1.3627) (-0.1605) (-3.5411) (1.5347) (-0.3741) AR (+2) -0.4227* -0.0833-0.4886** -0.3022-0.3582-0.6415** -0.9228 (-1.8187) (0.0769) (-2.0214) (-0.7700) (0.0972) (-2.3387) (-1.3571) AR (+3) -0.0348 0.5660*** -0.1515-0.6538** -0.1797 0.1026-0.1335 (0.6904) (3.0246) (-0.5784) (-2.0921) (-0.0372) (0.4181) (0.3268) AR (+4) 0.0898-0.3341 0.1721 0.3052** 0.3318-0.1552 0.4565 (0.7584) (-0.5268) (1.0609) (1.9692) (0.5024) (-0.5584) (0.6432)

AR (+5) 0.1530 0.4290 0.0994 0.5707 0.0614 0.1254-0.7511 (1.0445) (1.0074) (0.6974) (0.4901) (0.0431) (1.1828) (-0.5825) Cumulative Abnormal Return (%) CAR ( 1, 0) 1.080*** 0.7062 1.152*** 0.680 1.4342*** 0.7278* 3.036*** (5.0332) (0.3739) (5.3354) (1.3459) (4.5263) (1.8275) (3.3681) CAR ( 1, 1) 0.830*** 0.9193 0.813*** 0.0966 0.3900* 1.1322** 2.8642** (3.6386) (0.9228) (3.5696) (1.0063) (1.6515) (2.3782) (2.5340) CAR ( 1, 5) 0.616*** 1.4969* 0.4445** 0.0166 0.2453 0.5635 1.5133 (2.637) (1.9580) (2.0188) (0.5066) (1.3098) (1.0675) (1.2924) The country designations (DC and LDC) are based on the United Nations Conference on Trade and Development (UNCTD). *** Denotes significance at the 1%-level. ** Denotes significance at 5%-level. * Denotes significance at 10%-level. One major unresolved issue in domestic M&A research is the potential long-term underperformance of acquirers after mergers and acquisitions, but it has rarely been examined in foreign M&As. Since international mergers and acquisitions are location-oriented and might also be driven by the nature of their business, the present paper not only examines the long-term post-acquisition performance but also investigates whether it is affected by location choice and industrial affiliation. It is of great interest to determine whether there is a parallel similarity between domestic and foreign acquisitions on this issue. The results of one to five year post-merger performances in domestic M&A studies are mixed as reported in Table 1. Although, some studies find no significant post-merger underperformance for acquiring firms in their full sample (e.g., Wiggenhorn, Gleason, and Madura, 2007; Loderer and Martin, 1998; Franks, Harris, and Titman, 1991; Loughran and Vijh, 1997; Dodd and Ruback 1977; Malatesta, 1983; Mandelker, 1974), many others do. For instance, Magenheim and Mueller (1988), among others, show a staggering 42% cumulative average abnormal return over the interval of 3 months prior to and 36 months after acquisition. It is, however, criticized by Bradley and Jarrell (1988) for overestimation. In a more thorough analysis by Agrawal, Jaffe, and Mandelker (1992), negative five year cumulative abnormal returns after domestic acquisitions are found in four out of the five periods studied, at -3, -15, -19, and 23%, respectively, while the entire sample shows about a 10% wealth loss (with firm size and beta risk adjusted). Many other papers obtain similar negative results (e.g., Bradley, Desai and Kim, 1983; Asquith, 1983; Langetieg, 1978). Consequently, Ruback (1988) pessimistically states that long-term post-merger underperformance may have to be regarded as a fact. Although post-acquisition long-term performance has not yet been fully studied in international M&A, this paper shows that when the CAR event windows are extended to multiple years after foreign M&A announcement, there exhibits a double digit wealth effect decline in each of the first two years. The results for the full sample are reported in the first column of the top panel in Table 4. Not only does the initial announcement wealth effect vaporize, but it also takes some time for the acquirers to turn it around. The yearly performance only turns positive after three years, in year four and five. This seems to suggest that it is a lengthy process to integrate the targets and to realize the international diversification benefits envisioned and welcomed by the market at the time of the announcement. In particular, although, acquiring targets in developed countries (DC) creates sizable announcement wealth effect, it also creates more disappointments for the investors in the long run. Individual developed country results (e.g., U.K.) also follow this pattern. It seems that the benefits of acquiring targets in developed countries (e.g., reverse-internalization, the ease of integrating with targets, and better investor protection) anticipated on the announcement is slow to materialize. Acquiring targets in less developed countries (LDC) general little buzz on the announcement, but it turns out to be a more successful strategy in the long run. There are apparently much greater potentials of diversification in LDC than what investors can recognize at the time of the announcement. Overall, the substantial differences between the announcement wealth effect and the long-term performance indicate that the global diversification benefits investors envision on the announcement do not realize immediately and that they may also fail to recognize where the true international diversification benefits reside. Nevertheless, Fama (1998), in defending market efficiency, argues that long-term abnormal returns are often the result of the methodology implemented, but with modifications to the methodology they tend to disappear. To account for that and since it is well documented that GARCH (1,1) models can capture financial news reasonably well, a GARCH (1,1) specification is also used in this study to allow for time-varying volatility over the extended event

window period. After the estimation methodology is modified for the possible existence of heteroskedasticity, the long-term negative abnormal returns are substantially lowered, as shown in the bottom panel of Table 4. The argument by Fama (1998) appears applicable to international M&As as well. It follows that, in terms of estimating the performance of foreign M&A acquirers in the long run, methodologies do matter. Nevertheless, the patterns discussed above based on the standard methodology remain broadly similar. CONCLUDING REMARKS The long-term post-acquisition performance for acquirers in international M&A has not yet been fully examined in the existing literature. This paper takes the initiative to investigate whether there is a parallel similarity between the domestic and foreign mergers and acquisition on this issue. It is found that, similar to their domestic counterparts, the acquirers in cross-border M&A also experience long-term underperformance problem. However, different measures by a different methodology show a lesser degree of underperformance severity, although it is still persistent. The lackluster long-run performance appears to indicate what a daunting and time-consuming task it is to fully integrate the target and to materialize the potential global diversification benefits. Furthermore, the sharp contrast between the significant announcement wealth effect and the long-term post-merger underperformance seems to suggest that the global diversification benefits the investors envision on the announcement may not even realize. The results also show that investors tend to be too overly optimistic toward certain type of acquisitions (e.g., those in the developed countries) while too pessimistic on the other at the time of announcement. Table 4: Long-Term Post-Foreign-Acquisition Wealth Effect for U.S. Acquiring Firms This table shows long-term cumulative abnormal returns and their corresponding Z-values (in parenthesis) for sample acquiring firm groups, according to acquirer s industrial classification and destination countries, for the specific intervals based upon the domestic market model (the standard event study methodology) and GARCH (1,1) model. Full. Industry Classification.. Acquisition Target Countries. Interval Sample Manufacturing Other LDC DC Canada U.K. (N=369) (N=200) (N=144) (N=60) (N=309) (N=54) (N=115) Cumulative Abnormal Return (%): The Standard Domestic Market Model Methodology 1 Year -22.50*** -12.66*** -35.36*** -0.0192-26.88*** -15.62** -24.80*** (-7.6236) (-3.0931) (-7.6612) (0.0358) (-8.3465) (-2.3019) (-4.1706) 2 Years -39.83*** -14.92** -74.36*** -4.8010-46.69*** -16.24** -60.07*** (-9.4215) (-2.0622) (-11.587) (-0.5058) (-10.0848) (-2.0253) (-7.5033) 3 Years -41.19*** -14.53** -80.28*** -7.750-47.67*** 7.7602-73.48*** (-8.2494) (-2.1524) (-10.229) (-0.5516) (-8.7694) (-0.8449) (-8.0761) 4 Years -39.33*** -17.16* -73.78*** -1.7093-46.86*** 22.15-68.27*** (-5.9390) (-1.8591) (-7.2541) (0.9854) (-7.0348) (-0.7673) (-5.4735) 5 Years -32.37*** -7.47-70.97*** 17.33*** -43.30*** 33.22-70.98*** (-3.6119) (-0.3738) (-5.4650) (2.9838) (-5.5776) (-1.2167) (-4.1682) 2 nd Yr Only -17.34*** -2.26-39.00*** -4.7815-19.81*** -0.6119-35.28*** (-5.7398) (0.0467) (-8.6471) (-0.7187) (-5.9730) (-0.6202) (-6.2944) 3 rd Yr Only -1.3538 0.39-5.92* -2.9497-0.9782 24.00-13.41*** (-1.4587) (-0.8477) (-1.9422) (-0.2448) (-1.4939) (1.0344) (-3.4565) 4 th Yr Only 1.8555-2.63 6.50* 6.0410** 0.8034 14.39 5.2061* (1.3099) (-0.1384) (1.6236) (2.4895) (0.1964) (-0.1223) (1.7155) 5 th Yr Only 6.9613** 9.69** 2.81 19.04*** 3.567 11.07-2.7062 (2.2832) (2.0727) (0.8988) (3.8253) (0.5611) (-0.8886) (0.5937) Cumulative Abnormal Return (%): GARCH(1,1) 1 Year -11.93*** -10.80*** -14.104* -10.169* -12.86*** -10.846-13.686* (-3.5427) (-2.8183) (-1.7707) (-1.7585) (-3.1494) (-0.9244) (-1.8014) 2 Years -11.70*** -12.40** -11.345-14.326* -11.63** 0.530-15.064* (-2.6995) (-2.1381) (-1.3555) (-1.7375) (-2.2152) (0.0125) (-1.8606) 3 Years -10.16* -14.61* 1.461-12.149-9.278-14.706-6.849 (-1.6882) (-1.7458) (-0.1230) (-1.1567) (-1.2610) (-0.5192) (-0.9595) 4 Years -9.22-15.48 4.100-12.957-7.555-20.277 10.392 (-1.4738) (-1.6073) (-0.1140) (-0.7056) (-1.2370) (-0.5523) (-0.4488) 5 Years -15.10* -24.91** 6.985-16.867-14.187* -17.750 10.283

(-1.8919) (-2.2366) (0.0034) (-0.6746) (-1.7459) (-0.6474) (-0.4246) 2 nd Yr Only 0.23-1.595 2.759-4.157 1.238 11.375-1.379 (-0.2686) (-0.20023) (-0.1430) (-0.6966) (0.0228) (0.9458) (-0.8279) 3 rd Yr Only 1.54-2.214 12.806* 2.178 2.347-15.236 8.215 (0.8937) (-0.0001) (1.7039) (0.4538) (0.9487) (-0.9169) (0.9693) 4 th Yr Only 0.94-0.866 2.639-0.809 1.723-5.571 17.241 (-0.0222) (-0.1896) (-0.0148) (0.5941) (-0.2893) (-0.2053) (0.7662) 5 th Yr Only -5.88-9.433* 2.885-3.910-6.632 2.527-0.108 (-1.2835) (-1.7877) (0.2360) (-0.0969) (-1.4309) (-0.3430) (-0.0516) Intervals are the specified years since the M&A announcement unless noted as one particular year only. Other industries are firms not in manufacturing (SIC 2000 3999) and financial industries (SIC 6000 6999). The country designations (DC and LDC) are based on the United Nations Conference on Trade and Development (UNCTD). *** Denotes significance at the 1%-level. ** Denotes significance at the 5%-level. * Denotes significance at the 10%-level. REFERENCES Agrawal, A., Jaffe, J. F. and Mandelker, G. N. (1992). The Post-Merger Performance of Acquiring Firms: A Re-Examination of an Anomaly. Journal of Finance, 47(4): 1605-1621. Amihud, Y., DeLong, G. L. and Saunders, A. (2002). The Effects of Cross-Border Bank Mergers on Bank Risk and Value. Journal of International Money and Finance. 21, 857-877. Asquith, P. (1983). Merger Bids, Uncertainty, and Stockholder Returns. Journal of Financial Economics, 11: 51-83. Bradley, M., Desai, A., and Kim, E. H. (1983). The Rationale Behind Interfirm Tender Offers: Information or Synergy? Journal of Financial Economics, 11: 183-206. Bradley, M. and Jarrell, G. A. (1988). Comment. In John Coffee, Jr., Louis Lowenstein, and Susan Rose-Ackerman, editors, Knights, Raiders and Targets. Oxford, England: Oxford University Press. Cakici, N., Hessel, C., and Tandon, K. (1996). Foreign Acquisitions in the United States: Effect on Shareholder Wealth of Foreign Acquiring Firm. Journal of Banking and Finance, 20, 307-329. Datta, D. K., and Puia, G. (1995). Cross-Border Acquisitions: An Examination of the Influence of Related and Cultural Fit on Shareholder Value Creation in U.S. Acquiring Firms. Management International Review, 35, 337-359. Dodd, P. and Ruback, R. (1977). Tender Offers and Stockholder Returns: An Empirical Analysis. Journal of Financial Economics, 5: 351-374. Doukas, J. and Petmezas, D. (2007). Acquisitions, Overconfident Managers and Self-attribution Bias. European Financial Management, 13 (3), 531-577. Doukas, J., and Travlos, N. G. (1988). The Effect of Corporate Multinationalism on Shareholders Wealth: Evidence from International Acquisitions. Journal of Finance, 43, 1161-1175. Duru, A. and Reeb, D. M. (2001). Evidence on the Relation Between Geographic Diversification and Firm Value. Working Paper. Fama, E. F. (1998). Market Efficiency, Long-Term Returns, and Behavioral Finance. Journal of Financial Economics, 49(3): 283-306. Franks, J., Harris, R. and Titman, S. (1991).The Postmerger share-price performance of acquiring firms.journal of Financial Economics,29:81-96. Graham, J., Lemmon, M., and Wolf, J. (2002). Does Corporate Diversification Destroy Value? Journal of Finance, 57, 695-720. Holmstrom, B. and Kaplan, S. N. (2001). Corporate Governance and Merger Activity in the U.S.: Making Sense of the 1980s and 1990s. Journal of Economic Perspectives, 15, 121-144. Kiymaz, H. (2003). Wealth effect for U.S. Acquires from Foreign Direct Investments. Journal of Business Strategies, 20, 7-22. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., and Vishny, R. (1998). Law and Finance. Journal of Political Economy, 106, 1113-1155. Langetieg, T. C. (1978). An Application of a Three-Factor Performance Index to Measure Stockholders Gains from Merger. Journal of Financial Economics, 6: 365-384. Loderer, C. and Martin. K. (1992). Postacquisition Performance of Acquiring Firms. Financial Management, 19: 17-33. Loughran, T. and Vijh, A. M. (1997). Do Long-Term Shareholders Benefit From Corporate Acquisitions? Journal of Finance, 52 (5): 1765-1790. Magenheim, E. B. and Mueller D. C. (1988). Are Acquiring Firm Shareholders Better off After an Acquisition?. In John Coffee, Jr., Louis Lowenstein, and Susan Rose-Ackerman, editors, Knights, Raiders and Targets. Oxford, England: Oxford University Press. Malatesta, P. H. (1983). The Wealth Effect of Merger Activity and the Objective Functions of Merging Firms. Journal of Financial Economics, 11: 155-181. Mandelker, G. (1974). Risk and Return: The Case of Merging Firms. Journal of Financial Economics, 1: 303-335.

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