The legal environment and corporate valuation: Evidence from cross-border takeovers

The legal environment and corporate valuation: Evidencefrom cross-border takeovers

David R. Kuipersa,*, Darius P. Millerb, Ajay Patelc

aBloch School of Business, University of Missouri–Kansas City, Kansas City, MO USA 64110bCox School of Business, Southern Methodist University, Dallas, TX USA 75275

cBabcock Graduate School of Management, Wake Forest University, Winston-Salem, NC USA 27109

Abstract

We examine the cumulative abnormal returns to U.S. targets, their foreign acquirers, and the target-acquirer portfolio in 181 successful cross-border tender offers during the period 1982–1991. We find thatthe incentive mechanisms created by the degree of shareholder-creditor rights protection and legalenforcement in the acquiring firm country can explain the observed variation in target, acquirer, andportfolio returns. We also find that foreign acquirers overpay for Delaware-incorporated targets. Ourresults are strengthened after controlling for deal-related effects addressed in the domestic mergers andcross-border investments literature.

JEL classification: F23; G34; G38Keywords: Corporate governance; Regulation; International asset pricing; Tender offers;

State of incorporation

*Corresponding author, tel. 816.235.5792, E-mail address: [email protected] (D. Kuipers).

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1. Introduction

Why do managers from certain countries engage in value-increasing cross-border takeovers whilemanagers from other countries pursue acquisitions that destroy their shareholders’ wealth? Why do cross-

border mergers and acquisitions create total wealth that is positive in some cases and negative in others?What are the sources of the observed wealth creation or destruction? While these questions are crucial toour understanding of the market for cross-border corporate control, the extant empirical evidence is

somewhat ambiguous, particularly with regard to acquirer and portfolio returns.In this paper, we focus on the incentive mechanisms created by the legal environment and corporate

governance structure in foreign countries to explain the sources of value creation in the cross-borderacquisition of U.S. assets. La Porta, Lopez-de-Silanes, Schleifer and Vishny (1997, henceforth LLSV)introduced the notion that differences in investor protection against expropriation by insiders affect the

nature and effectiveness of capital markets around the globe. Subsequent studies have shown that thelegal environment and corporate governance structure affects the size and development of a country’s

capital market (LLSV, 1997), the severity of agency costs (LLSV, 2000), the type of ownership structure(La Porta, Lopez-de-Silanes and Schleifer, 1999), the properties of accounting earnings (Ball, Kothari andRobin, 2000), and the level of economic growth (Demirguc-Kunt and Maksimovic, 1998). In addition,

recent studies have begun to assess the valuation impact of the legal and corporate governanceenvironment at the industry and firm-specific levels, in terms of total firm value (LLSV, 2002; Lins,

2003), the investment strategy of firm management (Wurgler, 2000), and sector value across industries(Bris and Cabolis, 2008).

Our research provides an important contribution to the literature on corporate valuation by

examining for the first time the impact of the legal environment on the returns to U.S. target shareholders,foreign acquirer shareholders, and the (value-weighted) portfolio of target and acquirer returns. We aremotivated to do so for two reasons. First, Wurgler (2000) finds that if the legal protections accorded

minority investors are inadequate, corporate insiders are free to invest in ways that do not maximizevalue. Since the outright acquisition of another company is often the most dramatic and material example

of the manager’s investment decision, the study of cross-border takeovers provides an apt opportunity totest for this acquirer firm agency cost. Indeed, LLSV (2002) intimate that value creation in the cross-border investment decision should be directly related to the degree of shareholder rights, creditor rights,

and the legal environment of participating firms. We test this hypothesis directly in this paper, holding thelegal environment and corporate governance structure of target firms largely constant by examining

targets domiciled exclusively in the United States. Second, while existing studies on cross-bordertakeovers have largely focussed on product and factor market imperfections (Errunza and Senbet, 1981;Williamson, 1988), asymmetries in capital markets (Scholes and Wolfson, 1990; Froot and Stein, 1991),

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and deal-specific variables discussed in the single-country, traditional mergers literature (Jensen andRuback, 1983; Jarrell, Brickley and Netter, 1988), the impact of the legal environment in cross-border

takeovers is absent from this literature.We address this shortcoming by examining the cumulative abnormal returns to publicly-traded U.S.

target firms, publicly-traded non-U.S. acquiring firms, and the value-weighted portfolio of target andacquirer firms in a sample of 181 successful cross-border tender offers during the period 1982–1991.[1]We account for both firm-level and deal-related features of these takeovers, while also controlling for the

legal environment and corporate governance structure of the sample firms following LLSV (1998). Wefurther control for the investment opportunity set of target and acquirer firms—and by extension, the

opportunity for entrenched management to expropriate minority shareholders and creditors—by includingthe Tobin’s q ratio for both acquirers and targets in our analysis. We use our data set in cross-sectionalregression analysis to evaluate the inferential power of alternate theories in explaining the differential

sources of shareholder value in the cross-border investment decision.Our basic results can be summarized as follows. Consistent with the hypotheses in LLSV (2002) and

elsewhere, we find that the rule of law and the degree of shareholder rights protections for foreign

acquirer firms have significant explanatory power in an examination of acquirer and portfolio abnormalreturns. For acquirer returns, a negative and significant relation is also documented with the degree of

creditor rights protection in the acquiring firm’s country. We interpret our findings as supportive of theagency cost contracting hypothesis for corporate governance structure, and consistent with the argumentsin Wurgler (2000) and LLSV (2002) that the transfer of corporate governance structure and legal

standards across borders has significant valuation consequences for the firm’s capital investment decision.Further, for acquirer returns, we find that the significance of the LLSV indices are strengthened after

controlling for the deal-specific and market imperfections-based arguments studied in prior research.Since earlier studies of cross-border takeovers have generally been unsuccessful in finding consistentsources of variation for acquirer and portfolio returns, this study extends the traditional cross-border

mergers literature in a promising new direction.In addition, we find that deal- and firm-specific elements of the transaction, such as the degree of

bidding competition, the presence of toehold stakes, the level of target firm intangible assets and theTobin’s q of both acquirer and target, all have explanatory power in the analysis of U.S. target firmreturns. In this regard, our findings are consistent with U.S. target-centric studies in the literature

including Jensen and Ruback (1983), Bradley, Desai and Kim (1988), Lang, Stulz and Walkling (1989,1991), Servaes (1991), Harris and Ravenscraft (1991), Servaes and Zenner (1994), Dewenter (1995b), and

Eun, Kolodny and Scheraga (1996). However, we do find the interesting result, after controlling for thesetarget firm and deal-specific effects, that the rule of law and the level of creditor rights enforcement in the

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acquiring firm country are positively and significantly related to target returns. We offer two interpre-tations of this finding in the discussion associated with our empirical results, both related to the interplay

between managerial incentives and the implications of strong protections for the firm’s creditors.Finally, despite the fact our sample is constructed entirely of U.S. target firms, in an effort to hold

constant the target legal environment, we also provide a preliminary investigation into the impact of legalprotections and shareholder/creditor rights within the United States itself. To do so, we differentiate targetfirms based upon their incorporation in Delaware compared to other states, as well noting transactions for

which federal regulation and approval is required. For firms incorporated in Delaware, there isconsiderable debate whether the case law favors entrenched management at the expense of shareholders,

thus reducing firm value (Cary, 1974), or whether shareholders are protected leading to increased firmvalue (Winter, 1977; Daines, 2001). The potential costs and rewards to shareholders from interveningfederal jurisprudence can be similarly argued (e.g., Jarrell and Bradley, 1980).

We find weak evidence that U.S. target firm shareholders gain when federal approval is required forcross-border acquisitions, and these gains are at the expense of foreign acquiring firms. In the case ofDelaware incorporation, we provide strong evidence that Delaware targets impose significant acquisition

costs on foreign acquirer firms, and the portfolio return for these transactions is also significantlynegative, on average. If Delaware’s corporate governance environment results in firms being more highly

valued in the marketplace, then one implication of our results is that there must be less structuralinefficiencies in Delaware’s legal environment compared to other states. As a result, the opportunity forfirms acquiring Delaware incorporated targets to capture excess rents due to legal inefficiencies are

necessarily lower in a competitive market. We conclude that differential stakeholder protections and thelegal environment have valuation consequences that carry over to the intranational, as well as

international, context.The rest of the paper is organized as follows. Section 2 briefly outlines some potential motives for

cross-border acquisitions, which we examine in our later empirical tests. Section 3 describes our data and

sample selection procedure, along with some descriptive statistics regarding the data set. Section 4examines the abnormal returns and wealth changes for U.S. target firms, non-U.S. acquiring firms, and

the portfolio of target and acquirer firms. Section 5 presents our regression analysis of the cumulativeabnormal returns in cross-border takeovers as a function of the acquirer and target legal environment andcorporate governance structure, both alone and after accounting for control variables. We conclude with

some final comments in Section 6.

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2. Background and prior research

While the wealth effects of takeover acquisitions between same-country acquiring and target firms is anexhaustively studied area, particularly for U.S. domestic transactions, the empirical evidence regarding

cross-border acquisitions is less developed. What we do know is that the average abnormal return to U.S.targets of foreign acquirers is positive and significant on average, and the aggregate wealth gains aregreater than when the acquiring firm is from the U.S. (e.g., Harris and Ravenscraft, 1991). For foreign

acquirer returns, the evidence is more limited but generally suggests that acquirers earn zero or slightlynegative abnormal returns on average, with the apparent exception of Japan (Kang, 1993; Pettway,

Sicherman and Spiess, 1993).What motivates a firm to acquire assets outside its own country, and what are the valuation effects

of the investment decision? In this paper, we examine the proposition that the legal environment and

corporate governance structure for acquiring and target firms has valuation consequences in terms of thetypes of cross-border investments that managers choose to pursue. We provide some background on the

arguments that motivate this hypothesis below, along with some competing theories from the traditionalforeign direct investments literature.

2.1. The foreign acquiring firm’s legal environment and stakeholder protective rights

LLSV (1997) introduced the notion that differences in external corporate governance mechanisms as they

relate to investor protection against expropriation by insiders, along with the rigor of legal enforcementstandards within countries, affects the nature and effectiveness of capital markets around the globe. Betterprotection leads to more valuable firms (LLSV, 2002) and more profitable investment programs initiated

by management (Wurgler, 2000). Moreover, the formal structure of protection mechanisms can mitigatethe classic agency cost of the firm (Jensen and Meckling, 1976), particularly when the cash flow rights oflarge ownership blocks are strong (Claessens, Djankov and Lang, 2000; LLSV, 2002; Lins, 2003).

In this paper, we propose that relative differences in corporate governance rules between nations,and the transfer of these rules between target and acquiring firm in cross-border acquisitions, is a source

of value for merged firms in and of itself. Earlier studies have found significant variation in the gains toacquiring and acquired firms as a function of the nationality of the bidder, but the ultimate source of thisinternational variation in returns has not been satisfactorily addressed. We test whether the legal and

corporate governance environment that the acquiring firm operates in, relative to the legal environmentfor U.S. target firms, provides a partial explanation for the observed variation in returns. However, the

direction and significance of the valuation effect of international corporate governance rules in the contextof cross-border takeovers is not necessarily obvious.

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For example, in the classic agency cost framework, we expect managers in countries with strongshareholder rights to act in the interests of their shareholders and pursue more profitable acquisitions than

do managers from countries with weak shareholder rights, ceteris paribus. In effect, the agency cost

contracting hypothesis predicts that a formal corporate governance structure that protects shareholders

reduces the classical contracting costs for disciplining poor management. Alternatively, managers incountries with weak shareholder rights may regard the acquisition of U.S. assets—where shareholderrights are strong—as an opportunity to opt-in to a stronger corporate governance structure at a future date

(LLSV, 2002) via a cross-listing, spinoff or initial public offering of the acquired U.S. assets.[2] Thus, thecontractual convergence hypothesis (Gilson, 2000) predicts a negative relation between acquirer returns

and the degree of shareholder rights protections when U.S. assets are purchased.Creditor protections can also have economic value when foreign acquirers purchase U.S.-based

assets, if these rights encourage management to engage in risk-minimizing activities. For example, asset

diversification, via conglomerate takeovers or geographical diversity into U.S. markets, can reduce thevariability of firm cash flows and lower default risk (Asquith and Kim, 1982), thereby expropriatingshareholder wealth for the benefit of debtholders (Maquieria, Megginson and Nail, 1998). Managers may

also pursue risk-minimizing activities to reduce their employment risk (Amihud and Lev, 1981). Thus, inthis setting, the agency cost contracting hypothesis predicts a negative relation between the strength of

creditor protections and acquiring firm shareholder gains in cross-border takeovers.Alternatively, McDaniel (1986) argues that shareholders gain from mergers when bondholder rights

are protected, as shareholders need access to external credit markets to fund future expansion. The benefit

to shareholders provided by the monitoring role of lenders is well-documented (e.g., Mikkelson andPartch, 1986; James, 1987; Lummer and McConnell, 1989) and should be more credible the stronger are

creditor rights protections (Esty and Megginson, 2002). Further, LLSV (2000) document that total firmvalue is increased when both shareholder and creditor rights are strong. This effect is not a result of thetransfer of corporate governance rules between acquirer and target; as argued in LLSV (2000), the rights

of creditors generally remain in the same legal jurisdiction as the physical assets acquired. Instead, thefirm value maximization hypothesis predicts a positive relation between the degree of creditor protections

and acquiring firm shareholder returns, due both to the alignment of interests of all security holders of thefirm in a merger, and the monitoring role provided by well-protected lenders.

In addition to shareholder and creditor rights protections, the strength of legal enforcement in the

acquirer country should be an additional determinant in the valuation impact of the cross-border takeoverdecision. We follow LLSV (2002) and Lins (2003) in focussing not only on the rule of law, but its

interaction with shareholder and creditor rights in the acquiring firm country. A strong rule of lawcoupled with strong shareholder rights should result in a strengthened relation for the shareholder rights

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effect viewed in isolation, and similarly for a strong rule of law interacted with creditor rightsenforcement. However, a nation’s rule of law, as posited in LLSV (1998), reflects the rights enforcement

for all stakeholders in the firm, and not just its security holders. This can encompass the rights and claimsof employees, community standards and goodwill, governmental edicts, environmental compliance costs,

and political concerns. As a result, a strong rule of law interacted with shareholder and creditor rights maymitigate the valuation effects of the corporate governance structure on security holders viewed inisolation, and we explicitly control for this possibility in our empirical tests.

2.2. The U.S. target firm’s legal environment

Besides the legal environment and corporate governance protection mechanisms for foreign acquirerfirms, we are also interested in this paper with the valuation impact of legal structure within the UnitedStates itself. First, we examine the returns for acquisitions of targets incorporated in Delaware compared

to targets incorporated in other states.[3] Cary (1974) argues that Delaware case law supports entrenchedmanagers and imposes social costs on the disciplining mechanism for takeovers of inefficient firms.Daines (2001) counters with empirical evidence that Delaware incorporated firms are more valuable, and

more frequent takeover targets, independent of firm operating characteristics. He concludes that Delawareincorporation creates value by facilitating the sale of firms and reducing barriers to agency cost

mitigation, either by the creation of customized contracts (Easterbrook and Fischel, 1991) or thealignment of managerial and shareholder interests resulting from the case law.

Daines’ (2001) study provides an important testable hypothesis for our research. If the market is

efficient with respect to the value of Delaware’s political economy, then the gains to target firmshareholders should be independent of the state of incorporation. Said differently, the state of

incorporation is a strawman (Black, 1990), as we view the valuation consequences ex post. At the sametime, if Delaware targets fully capture this value, the achievable gains to takeover that ensue fromstructural inefficiencies in the market for corporate governance within the United States are zero. In the

extreme, if Delaware firms attract greater bidding competition and acquirers view Delaware firms as morevaluable ex ante, acquirers can suffer a winner’s curse and overpay for the assets of Delaware relative to

non-Delaware firms. In this regard, our paper adds to the results in Daines by testing for whether thevalue created by Delaware incorporation is fully captured by Delaware targets, and whether there areassociated costs imposed on the acquiring firm.[4]

We also examine the role of federal regulatory scrutiny and intervention when foreign acquirerspursue U.S. firms via tender offer. Proponents of tender offer regulation argue that it encourages

information production and increases competition for target assets. As a result, target premiums should behigher. Regulatory opponents counter that the increased regulatory burden creates disincentives to acquire

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firms outright, with associated social costs of foregone but desirable takeover activity; in effect, creating atax on the potential acquiring firm. Consistent with the latter view, Jarrell and Bradley (1980) and

Bradley, Desai and Kim (1988) document that increased tender offer regulation results in higher returns totarget shareholders and lower returns to acquiring firm shareholders in domestic U.S. tender offers; Eckbo

and Weir (1985) find that federal antitrust regulation imposes social costs on efficient mergercombinations without effectively identifying cases of true market power nor anticompetitive behavior.

In the case of cross-border acquisitions of U.S. assets, the role of federal regulatory intervention is

potentially more pronounced than in the case of domestic tender offer transactions. During the sampleperiod, the Exon-Florio Act and the oversight purview of the Committee on Foreign Investment in the

United States (CFIUS) served to increase the costs imposed on foreign acquirers of U.S. firms. Proposedacquisitions were subject to discretionary federal interagency review and potential presidentialinterdiction to block these acquisitions (50 U.S.C. app. §2170; 31 C.F.R. §800.101–.702). The stated

rationale for this new regulatory burden was to protect U.S. assets from foreign control, particularly in theareas of national security, raw materials infrastructure, and high technology expropriation.

There can be valuation consequences to this type of federal intervention for both U.S. targets and

their foreign firm acquirers. For example, the process of regulatory approval can discourage firms frompursuing efficient acquisitions, or delay resolution of a takeover attempt—in both cases resulting in social

costs and deadweight losses in support of the public good. Entrenched target management canconceivably use regulatory interdiction as an implied or overt antitakeover defense mechanism, thwartingdesirable combinations to the detriment of shareholders. Alternatively, if foreign acquirers wish to

mitigate such actions and regulatory burden, along with preempting competitor bidders not subject tofederal review, they can offer premiums for those transactions to resolve bidding uncertainty and achieve

successful bidding outcomes. To our knowledge, this is the first paper that attempts to measure thefinancial market costs associated with this unique application of federal regulation and legislation.[5]

2.3. Asymmetries and imperfections in international asset markets

Errunza and Senbet (1981) and others propose industrial organization-based theories of foreign direct

investment (FDI) to explain the cross-border expansion of firms. In their models, FDI can be attributed toimperfections in the market for goods, services and factors of production (Krugman (1987) provides anoverview); overseas expansion allows the firm to obtain monopolistic rents from the specialized resources

it possesses. If the market for these resources is inefficient, cross-border acquisitions allow the firm tointernalize the market for the resource and transfer it overseas (Williamson, 1988). A prime example of a

specialized resource owned by firms that can exist in an inefficient global marketplace are technicalassets—such as the firm’s research and development (R&D) program, or alternatively, its portfolio of

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intangible assets. Cebenoyan, Papaioannou and Travlos (1992) and Eun, Kolodny and Scheraga (1996)provide evidence that R&D intensity is related to the observed gains from cross-border takeovers, and

Swenson (1993) finds a similar relation in the case of intangible assets; however, Harris and Ravenscraft(1991) and Cakici, Hessel and Tandon (1996) find no significant relation.

Imperfections in the global market for managerial talent can also motivate FDI and cross-borderacquisitions. Superior managers may be able to monetize their abilities by expanding overseas in relatedindustries, and thus be willing to pay higher premiums for U.S. targets in the same sector. Marr, Mohta

and Spivey (1993) provide supporting evidence that target returns are positively related to acquirerindustrial relatedness; Harris and Ravenscraft (1991) and others find no relatedness effect. A possible

explanation for these mixed results not addressed in earlier cross-border takeover papers relies on the useof Tobin’s q, rather than business relatedness, to capture this effect. In domestic takeover studies, Lang,Stulz and Walkling (1989, 1991) and Servaes (1991) document a significant relation between target q,

acquirer q, and the gains to merger. To the extent that q provides a measure of the firm’s investmentopportunity set, and thus the incentives to make profitable acquisitions, it will capture aspects of thevaluation of managerial talent obscured by relatedness effects. Viewed differently, Tobin’s q acts as a

proxy for the free cash flow agency costs of the firm, and thus, the risk that poor management willexpropriate shareholder wealth (Lang, Stulz and Walkling, 1991).

In addition to market imperfections, informational asymmetries and structural barriers to integratedcapital markets can create differential valuation of assets across borders. Froot and Stein (1991) provide amodel where the existence of informational asymmetries prevents entrepreneurs from purchasing assets

solely with external funds. Therefore, internal funds, or the net wealth of the acquirer, are needed tocomplete the acquisition. Since the net wealth of the foreign acquirer relative to a domestic asset acquirer

varies with the real exchange rate, foreign bidders are at an advantage when the real value of theircurrency rises versus the dollar. Harris and Ravenscraft (1991), Cebenoyan, Papaioannou and Travlos(1992), Kang (1993), Swenson (1993) and Dewenter (1995a) provide weak evidence that U.S. target

abnormal returns and foreign acquirer returns are related to the real value of the foreign acquirer’scurrency, while Servaes and Zenner (1994), Dewenter (1995b) and Eun, Kolodny and Scheraga (1996)

find that the exchange rate is not informative.An alternate structural barrier in global capital markets is proposed in Scholes and Wolfson (1990),

who note that differential taxation across borders should have a measurable effect on the level and

profitability of investment activity in the U.S.—and by extension, the value of U.S. targets to domesticand foreign acquirers. Specifically, Scholes and Wolfson argue that the 1981 Economic Recovery Tax

Act (ERTA), with its investment tax credits and accelerated depreciation schedules, substantiallyincreased the tax incentives for acquisitions of U.S. assets by domestic purchasers, with a consequent

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implicit tax imposed on foreign acquirers as a result. Conversely, the 1986 Tax Reform Act (TRA),featuring reduced marginal corporate tax rates in the U.S. and deferred tax payments for foreign parties

until their ultimate repatriation, increased the value of U.S. assets to foreign investors domiciled in hightax jurisdictions. Boebel, Harris and Parrino (1993) and Servaes and Zenner (1994) document strong

support for the relative taxation argument across the two regime changes, while Harris and Ravenscraft(1991), Dewenter (1995b), and others do not find support for tax regime effects in the returns to cross-border takeover transactions.

What conclusions can be drawn from the existing empirical literature on the wealth effects of cross-border takeovers? It would appear that the sources of wealth changes to U.S. targets are inconclusive, and

the evidence regarding foreign acquirer and portfolio returns is not well-developed. This is due, at least inpart, to a past focus on single-country acquirers or perhaps, insufficient data to examine the firm-specificcharacteristics of foreign bidders. We approach the problem in this paper by exploring a different

framework for analysis: the corporate governance structure and legal environment in which the acquiringand target firms operate. At the same time, we control for firm and deal-specific factors, and construct adata set comprised of multiple acquirer countries.

3. Data description

The “Foreign Investment in the United States” section of the M&A transactions roster in Mergers and

Acquisitions was initially reviewed for the time period January 1982–December 1991 to identifysuccessful tender offers for U.S. targets by foreign acquirers.[6] Announcement and effective dates for the

offers were verified using The Wall Street Journal, The Wall Street Journal Index, LEXIS/NEXIS, andthe actual SEC filings for the bids (when available). We collect the first announcement date of a formal

bid for the target firm and not the first rumored bid that appears in the press. Hence, we expect that ingeneral, there will be some information leakage effects for the firms in our sample relative to the initialannouncement date (Jarrell, Brickley and Netter, 1988). For multiple bid offers, we also collect the date of

the first announced bid by the eventual winning foreign bidder (if applicable) and the announcement dateof the ultimately successful bid, following the method in Bradley, Desai and Kim (1988).

The initial sample from Mergers and Acquisitions was supplemented and verified using thefollowing information sources: The Wall Street Journal, The Wall Street Journal Index, New York Times,

IDD Mergers and Acquisitions Database, PR Newswire, Business Newswire, Worldscope, Extel, The

Financial Times (London), and SEC document filings 14-d1 (for bidders) and 14-d9 (target managementresponse); in all cases, precedence was placed on the information appearing in SEC filings and The Wall

Street Journal. Transactions were discarded if an intervening material event (other than the tender offer)occurred for the target or acquirer during either the event period or market model test period; if the

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foreign acquirer’s stock was not publicly-traded on its home country exchange; if the U.S. target was notpublicly-held; or if the true identity of the foreign acquirer could not be discerned. The nationality of

acquirer firms was verified using Ward’s Business Directory of Major International Companies and Who

Owns Whom: Australia & Far East, Continental Europe, North America, and United Kingdom &

Republic of Ireland, where appropriate. These data screens result in a preliminary sample of 224 cross-border tender offers during the sample period.

For acquisitions meeting these initial screening criteria, we next check for successful takeovers,

which we define as the foreign bidder gaining 50% or greater control of the voting shares of the targetfirm for the first time. Thus, toehold acquisitions, cleanup transactions, and unsuccessful offers are not

part of our sample.[7] Transactions involving financial services firms, regulated utilities, and acquirerswith full or partial government ownership are discarded. Finally, for U.S. targets we require share pricedata on the CRSP returns tape and financial statement information on COMPUSTAT; for foreign firms,

we require daily stock prices and returns from Datastream International and financial statementinformation from COMPUSTAT Global Vantage; and for both target and acquirer, we require no missingstock returns during the announcement event period. After employing these criteria, our final sample for

analysis consists of a matched set of 181 successful tender offers for U.S. target firms by 150 uniquepublicly-held foreign acquirer firms during the period 1982–1991.

Insert Table 1 About Here

The sample distribution of cross-border tender offers by home country of acquirer, target industry

group, and year of first announcement is presented in Table 1. The largest group of acquirers comes fromthe United Kingdom, accounting for 76 of the 181 takeovers in our sample. Japanese firms constitute the

second largest acquirer group with takeovers of 19 U.S. firms, followed in sample size by French,Canadian and Swiss firms that acquire 16, 13 and 12 U.S. targets, respectively.[8] Altogether, our samplehas representation from each of the four legal families discussed in LLSV(1998), of both common-law

and civil-law origin. In terms of U.S. target industry groups, there is a broad distribution of takeoversacross industries and acquirer countries with no strong pattern or preference for one industry group and

acquirer country compared to any other, with the exception of the lack of takeovers in the chemicalsindustry by U.K. acquirers during our sample period.

The annual variation in the number of U.S. takeovers in the 1982–1991 period, shown in Panel B, is

similar to the evidence documented in Scholes and Wolfson (1990). The number of takeovers after 1986exceeds the number prior to 1987, consistent with their tax-based argument for the flow of cross-border

capital related to passage of the Tax Reform Act of 1986. However, the variation over time in cross-border takeover frequency is also consistent with the exchange rate argument of Froot and Stein (1991)

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and the associated empirical results in Harris and Ravenscraft (1991). It is difficult to differentiatebetween these competing hypotheses in this time period, given the contemporaneous correlation between

the change in tax regime and the structural shift in the value of the dollar in 1986.Table 2 reports deal characteristics and firm-related variables of the foreign takeovers in our sample,

differentiated by home country of the acquirer. With respect to the average takeover value in Panel A,even though firms from the U.K. engaged in the largest number of takeovers (76), the average (median)deal size of $372 million ($111 million) is smaller than the average (median) deal size of $533 million

($141 million) for the full sample. Firms from Canada and France are involved with the largest deals,averaging $966 million and $985 million, respectively. Except for French acquirers, the median deal size

is significantly smaller than the average deal size, reflecting the presence of several extremely large cross-border takeovers during this time period.[9]

Insert Table 2 About Here

Also reported in Panel A is the average premium paid by the foreign acquirer, where the premium ismeasured as the ratio of the target’s stock price five days after the effective date of the takeover (ED+5)

to the stock price 20 days prior to the first announcement date (AD–20). The average premium of about50% is consistent with the raw tender offer premia reported in other studies (e.g., Jensen and Ruback,

1983). Contrary to the conventional wisdom, the Japanese do not appear to have overpaid for their targetsin this time period, relative to the premia paid by other foreign acquirers. Panel A also shows that roughlyhalf (47%) of the transactions involve U.S. targets incorporated in Delaware, and nearly 65% of the

takeovers in our sample require at least cursory regulatory review and approval from agencies such as theFederal Trade Commission, the Department of Justice and the Department of Defense. The number of

foreign takeovers that required regulatory approval varies by acquirer country, with bidders from Franceand Japan needing regulatory approval in over 80% of the transactions.

The remaining descriptive statistics in Panel A of Table 2 indicate that our sample is similar to data

examined in prior studies. For example, the modest number of observations involving hostile offers, stockas a method of payment, and large toehold stakes is consistent in character with the data used in Harris

and Ravenscraft (1991), Dewenter (1995b), Eun, Kolodny and Scheraga (1996), and others.[10] Inaddition, we find that 57% of the foreign acquirers in our sample operate in a related industry with theirU.S. target.[11] The fact that a majority of the acquirers engage in related industry transactions is

consistent with industrial organization-based theories of cross-border capital flows, where firms engage inoverseas expansion into related businesses in order to exploit the firm’s specialized resources

(Williamson, 1988). Finally, 67 (37%) of the transactions in the sample involve multiple bid offers, afrequency again similar to the data examined elsewhere.

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Panel B of Table 2 provides descriptive statistics on firm-related variables in the data. On average,the acquirer is roughly ten times as large as the U.S. target in terms of total assets and sales, similar to the

size disparities noted in domestic takeover studies (e.g., Asquith, Bruner and Mullins, 1983). However,the relative difference in target and acquirer size varies somewhat by bidder country, with Canadian firms

pursuing the largest-sized U.S. targets, on average. The foreign acquirers also feature less leverage thantheir U.S. targets, as well as a greater ratio of intangible to total assets and lower Tobin’s q ratios. Despitethe sample averages, there is considerable variability across transactions and acquirer country with respect

to these variables, suggesting that foreign firms engage in much different types of acquisitions. Given theextant empirical evidence documenting a strong relation between target wealth gains, bid characteristics,

firm-specific characteristics and operational relatedness, our descriptive statistics present a compellingcase to control for these variables in the cross-sectional regression analysis that follows.

4. Target, acquirer and portfolio cumulative abnormal returns in cross-border takeovers

4.1. Methodology

To estimate abnormal returns, we employ standard event-study methodology. Market-model parametersare estimated for a period of 200 days that begins 260 days before and ends 61 days prior to the initial

announcement date (AD) of the offer (this date can be different for target and acquirer firms when acompeting bidder other than the ultimate foreign acquirer bids first). Daily abnormal returns for firm j are

measured as the market model prediction error during the event period, and cumulative abnormal returns(CARs) are formed over various event window lengths. For inference testing on the significance ofindividual daily abnormal returns (ARs) and CARs, standardized ARs and standardized CARs are

constructed and evaluated using the test statistic in Mikkelson and Partch (1988). For all firms, wemeasure the initial two-day announcement effect (AD–1 to AD 0) and several broader event windows,beginning as soon as 20 days before the initial announcement date and ending as late as five days after the

last announced bid, which we regard as the effective date (ED) of transaction closure. We focus on thelonger event window (AD–20 to ED+5) for most of our analysis to facilitate a comparison of our findings

with those in earlier cross-border takeover studies.[12]For U.S. targets, market model and abnormal returns are constructed using the equally-weighted

CRSP index. For foreign acquirers, market model and abnormal returns are constructed using the country-

specific, equal-weighted market indices provided by Datastream International. As a result, we are notlimited to an examination of acquirers with U.S.-based ADRs as in Servaes and Zenner (1994), nor must

we resort to the mean-adjusted returns methodology employed in Eun, Kolodny and Scheraga (1996).Daily abnormal returns, CARs, and standardized CARs for target-acquirer portfolios are constructedfollowing the method in Bradley, Desai and Kim (1988).

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4.2. CAR values and wealth gains for targets, acquirers and portfolio over different event windows

Table 3 reports the cumulative abnormal returns (CARs) for U.S. targets, foreign acquirers, and theportfolio of target and acquirer for the complete sample over various event windows. Table 3 indicates

that the average CAR during the two-day announcement window (AD–1 to AD 0) is a highly significant+23.1% for U.S. targets, and a similarly significant –0.92% for foreign acquirers. The results are similarto the abnormal returns documented in Jensen and Ruback (1983) for domestic takeovers, who find that

the lion’s share of the gains are captured by target shareholders at the expense of the acquiring firm. Infact, the returns for target and acquirer for all event windows in Table 3 are significant, with CAR values

rising to +35.8% over the long-horizon window AD–20 to ED+5 for targets, and losses increasing to–2.12% for acquirers over this same window. These returns are similar to those found in prior cross-border takeover studies; for example, Harris and Ravenscraft (1991) document target CARs of +39.8%

over the AD–20 to ED+5 window, while Eun, Kolodny and Scheraga (1996) find acquirer CARs of–2.28% over the window AD–5 to ED+5 (compared to –2.14% in Table 3).

Insert Table 3 About Here

In the case of portfolio CARs, Table 3 indicates that cross-border tender offers are wealth-increasing

transactions, on average, over all event windows. The two-day announcement return is a positive andhighly significant 2.99%, this portfolio return increasing to 5.03% over the longer AD–20 to ED+5 eventperiod. In addition, Table 3 suggests that information leakage in the market prior to the announcement

date of a foreign takeover bid occurs, with positive and significant U.S. target CAR values of +3.6% overthe event window AD–20 to AD–6, an effect also documented in Kang (1993) and Servaes and Zenner

(1994). However, we do not find any preannouncement effect for the foreign acquiring firm.

Insert Table 4 About Here

As a final element of our univariate analysis, Table 4 reports the U.S. dollar value of the synergygains to cross-border tender offers in our sample, as well as separate results for the abnormal wealth

created for U.S. target and foreign acquirer firms.[13] Given the CAR values documented in Table 3, it isnot surprising that significant wealth is created in these transactions, with the average deal resulting in$103 million of revalued wealth for the combined entity. Consistent with prior studies of the domestic

takeover market (e.g., Bradley, Desai and Kim, 1988), these wealth gains are entirely captured by targetfirm shareholders ($122 million per tender offer), with foreign acquirers losing an insignificant $31

million in the acquisition process. However, Table 4 also shows there is significant variation in the wealth

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gains to cross-border takeovers, depending on the home country of the acquiring firm. In the next section,we explore factors that may play a role in the observed division of wealth gains.

5. Cross-sectional regression tests of target, acquirer and portfolio CARs

5.1. Legal environment and corporate governance structure effects

Table 5 reports the results of cross-sectional, weighted, least-squares regression tests of the target,

acquirer and portfolio CAR values documented in Section 4, as a function of the legal environment andcorporate governance structure of the foreign acquiring firm and variation in legal environment for their

U.S. target firms. We weight the regressions by the standard deviation of the market model residuals tocontrol for heteroskedastic effects in the panel data. We estimate three alternate models in Table 5 fortarget, acquirer and portfolio CARs over the long-window event period AD–20 to ED+5: (1) as a function

of the strength of legal enforcement within the acquirer country; (2) the degree of shareholder and creditorrights protections in the acquirer country, alone and interacted with the strength of legal enforcement; and

(3) the differential returns for tender offers either involving Delaware-incorporated targets or subject toU.S. federal regulation, after controlling for the acquirer firm’s corporate governance environment.

Insert Table 5 About Here

Regression model (1) examines the univariate impact of the rule of law in the acquiring firm country

on the observed abnormal returns for the sample transactions. Foreign acquirers earn significantly higherreturns when the rule of law is strong in their country, and their U.S. targets earn significantly loweracquisition premiums. From the acquirer’s perspective, this result complements the findings in Wurgler

(2000) that firms make better and more profitable investment decisions the greater are stakeholderprotections. If managers are properly incentivized by legal precedent, structure, and constraints, theywillingly bear search costs to identify profitable investments for the benefit of the firm’s security

holders—and pay lower acquisition premiums as a result. In this sense, the legal environment in whichfirms operate serves as a substitute contracting mechanism for mitigating agency costs (LLSV, 1998).

However, legal enforcement and the strength of the rule of law in a nation reflects the protectionsaccorded to all stakeholders of the firm, and not necessarily the rights and protections of security holdersalone. As a result, regression model (2) in Table 5 examines the returns to U.S. targets, foreign acquirers,

and the combined entity as a function of the specific rights protections for shareholders and creditorsseparately, along with the rule of law and interactions between these variables. Simultaneously, we can

examine whether any of the agency cost contracting, contractual convergence, or firm maximizationhypotheses offer significant explanatory power in the observed variation in returns. We document severalinteresting findings.

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For acquirers, we find that returns are significantly greater the stronger are shareholder protections,and significantly lower the greater are creditor protections. These results are consistent with the agency

cost contracting hypothesis and the interplay of the inherent shareholder-bondholder conflict within thefirm (Jensen and Meckling, 1976). When shareholders are protected, the alignment of interests between

managers and shareholders is strong, and managers pursue wealth-creating investment policies for theirshareholders as a result. Conversely, when creditors are protected, managers engage in cross-bordertakeover activity that reduces shareholder wealth. Our findings suggest that expropriation of one class of

security holders at the expense of the other in the cross-border investment decision is possible, if thereexists variation in the corporate governance structure of the firm with respect to its security holders.[14]

In addition, regression model (2) reports that the interaction between the rule of law and theprotections accorded security holders mitigate the benefits of reduced agency costs from the acquiringfirm shareholders’ perspective. If a strong rule of law and legal enforcement doctrine protect the interests

of non-security-owner stakeholders of the firm, the alignment of interests between management andshareholders, and management and creditors, is weaker. Consistent with this argument, Table 5documents that the interaction between the rule of law index and shareholder protection mechanisms is

negative and significant for acquirers, and the interaction between the rule of law and creditor protectionmechanisms is positive and significant. In both cases, the sign of the estimated coefficient is the opposite

of the coefficient sign for shareholder and creditor rights alone. In fact, after including the interactionterms, the rule of law index itself is no longer significant in the acquirer firm regression of model (2),emphasizing the interplay between the legal protections accorded security holders and non-security owner

stakeholders of the firm in explaining differential shareholder returns.[15]In the case of U.S. target firms, we do not find any significant impact on shareholder returns as a

function of the acquiring firm’s legal environment in regression model (2). However, the portfolioabnormal return for the combined entity does exhibit a highly significant effect for the role of acquiringfirm shareholder protections, of the same sign as documented for acquirer returns. The finding of a

significant relation suggests that differences in corporate governance structure across borders is a sourceof value for merged firms, in and of itself (LLSV, 2000). Further, our results confirm the findings in

LLSV (2002), Lins (2003) and Bris and Cabolis (2008) that firms operating under stronger legalenvironments are more valuable—but in this case applied to the specific instance of merged firms withdifferential cross-border corporate governance structures. We address whether this source of portfolio

value is robust to more traditional sources of merged-firm value, such as synergy effects and capitalmarket imperfections, in the next section.

Finally, in regression model (3) of Table 5, we examine the role of Delaware-incorporated targetsand U.S. federal regulation oversight of cross-border tender offers, after controlling for differences in the

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acquiring firm legal environment. For the latter, we find that target returns are higher when the transactionis subject to federal regulatory review, consistent with the results in domestic studies such as Jarrell and

Bradley (1980), but without a finding of associated costs imposed on the acquiring firm. This supports thetraditionalist view that regulatory intervention furthers the public good by encouraging information

production and soliciting more attractive bids for the benefit of target shareholders.However, the most interesting result in (3) concerns the significant negative impact of Delaware

incorporation on foreign acquirer returns. Consistent with the argument in Daines (2001) regarding the

efficiency of Delaware’s political economy, we do not find that Delaware targets earn significantly higherabnormal returns than non-Delaware targets—though we note the conditional nature of our sample with

respect to an examination of successful tender offers alone. Nonetheless, the evidence strongly suggeststhat foreign acquirers overpay for Delaware firms, and this finding is independent of the acquiring firm’scorporate governance structure and, thus, the severity of agency costs within the bidding firm.[16]Perhaps more important, the significance of Delaware incorporation for the returns to foreign acquirerssupports the notion that corporate governance structure within the United States is a source of differentialvalue to acquiring firms.

5.2. Control effects: Firm-specific and deal-related variables

We examine the robustness of our findings regarding the determinants of target, acquirer and portfolioreturns in cross-border tender offers as a function of the foreign acquiring firm and U.S. target firm legalenvironments, as reported in Table 5, after consideration of control variables. We address two sets of

potential controls: deal-specific features of the transaction as explored in the traditional mergers literature,and foreign direct investment variables from the extant cross-border acquisitions literature. For target,

acquirer and portfolio CAR values, we estimate cross-sectional, weighted, least-squares regressionmodels over the same long-window event period AD–20 to ED+5 as before; Table 6 reports the results.

Insert Table 6 About Here

In regression model (1) we examine deal-specific variables that have been shown to affect the

returns to targets and acquirers in tender offer acquisitions: the degree of bidding competition (Bradley,Desai and Kim, 1988); the size of the acquirer’s toehold stake in the target (Choi, 1991); the method ofpayment (Franks, Harris and Mayer, 1988); the reaction of target firm management to the acquiring firm’s

offer (Huang and Walkling, 1987); and the relative size of target and acquirer firms (Asquith, Bruner andMullins, 1983). Our findings generally conform to expectations. The greater the bidding competition for

assets, the higher are target returns and the lower are acquirer returns; portfolio returns are positive but

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not significant. Targets earn significantly lower returns when the acquirer has established a prior equitystake, and significantly higher returns when the target is large compared to the acquirer.

Only two findings from regression model (1) are somewhat unusual. First, we find no significanteffect for the method of payment in determining target, acquirer or portfolio returns; in fact, the sign is the

opposite of expectations. However, we are hesitant to place much weight on this result given the paucityof cross-border transactions involving stock as a full or partial method of payment. More interesting is ourfinding that offers opposed by target firm management create value for the combined entity, with lower

returns (albeit not at significant levels) for target shareholders. We return to this result in later analysis.Model (2) in Table 6 examines the abnormal returns for targets, acquirers and portfolio as a function

of capital market imperfections and asymmetries. We include these variables as controls to facilitatecomparisons with earlier research in the cross-border acquisitions literature. The regressors in model (2)are the level of target firm intangible assets (Cebenoyan, Papaioannou and Travlos, 1992; Swenson, 1993;

Eun, Kolodny and Scheraga, 1996);[17] business relatedness between acquirer and target firms (Marr,Mohta and Spivey, 1993); transactions subsequent to the 1986 Tax Reform Act (Boebel, Harris andParrino, 1993; Servaes and Zenner, 1994); and the level of the real exchange rate of the foreign acquirer’s

currency relative to the U.S. dollar (Harris and Ravenscraft, 1991; Kang, 1993; Swenson, 1993;Dewenter, 1995a). In addition, we include the Tobin’s q ratio for target and acquirer firms akin to

domestic tender offer studies such as Lang, Stulz and Walkling (1989, 1991) and Servaes (1991), underthe premise that q proxies for managerial talent; Servaes and Zenner (1994) consider target q ratios in anexamination of target returns in cross-border acquisitions.

Compared to prior studies, our findings in (2) are mixed. We provide strong evidence that the levelof U.S. target firm intangibles leads to higher target returns and smaller (though positive and significant)

portfolio returns, supporting the arguments in Errunza and Senbet (1981) and Williamson (1988)regarding FDI as a means for internalizing the specialized resources of the firm. Consistent with Harrisand Ravenscraft (1991) and Dewenter (1995b), we find no evidence of a business relatedness effect. We

also find that target returns are significantly higher when low q targets are acquired by high q firms; poormanagers are subject to market discipline and are replaced with superior managerial talent (Lang, Stulz

and Walkling, 1989; Servaes, 1991). These efficiency gains from managerial replacement are entirelycaptured by target firm shareholders (acquiring firm returns are insignificant with respect to q).

However, we do not find any meaningful tax or exchange rate effects in our results for either target,

acquirer or portfolio returns in regression model (2). On a univariate basis, for target returns, we find botheffects to be present in our data; i.e., target returns are higher after the 1986 Tax Reform Act, and target

returns are higher when the acquirer’s currency is relatively more valuable. The fact that neither of thesevariables is significant when examined together suggests that multicollinearity is partially at work, and

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may explain the mixed findings in earlier research for these variables. Indeed, we find the simplecorrelation between them to be 57% in our sample.[18] Nonetheless, if we re-estimate model (2) with the

tax variable omitted, and alternately the exchange rate variable omitted, neither of the retained variables isever significant in any regression in Table 6 in the presence of other control variables. We conclude that

while multicollinearity may partly explain the disparate results regarding tax and exchange rate effects inearlier research, the results presented here suggest that both provide marginal explanatory power in thedetermination of the returns to participating firms in the cross-border acquisition of U.S. assets.

In regression model (3) in Table 6, we re-estimate model (3) of Table 5 after controlling for models(1) and (2) of Table 6. Focussing first on the acquiring firm shareholder returns, we document that our

earlier results concerning the role of the legal environment are robust to the inclusion of control variables(none of which are significant), while the corporate governance variables are strengthened in terms oftheir statistical significance compared to Table 5. Moreover, the regulatory review variable becomes

significantly negative in the presence of controls, whereas before it was not different from zero. We drawtwo conclusions from these findings. First, the primary source of relative value to acquiring firmshareholders in cross-border tender offers for U.S. assets is the legal environment in which the competing

firms operate. To acquirers, the resolution of agency costs in the corporate investment decision, asenforced by the relevant governance structure, supercedes the differential benefits associated with the

specific asset acquired and the characteristics of the purchase. Hence, our study adds to the findings ofWurgler (2000) and LLSV (2000, 2002); not only are firms more valuable when the protections accordedsecurity holders are strong and well-enforced, but security holders are directly rewarded as a result.

Second, earlier studies provide mixed results regarding the returns to foreign acquirers in the cross-bordertakeover of U.S. firms. Our findings here suggest that one explanation lies in a consideration of the

agency costs incurred by the firm, as captured by the legal environment and security holder protectionindices first proposed in LLSV (1997, 1998).

For U.S. target firms, the results from regression model (3) suggest that abnormal returns are largely

a function of deal-specific and firm-related effects. In this regard, our findings are supportive of priorstudies that focus on the returns to U.S. target shareholders alone. Specifically, we find that the level of

intangible assets, the q ratio for both target and acquirer, and the degree of bidding competition areimportant determinants of the gains to shareholders, though the impact of toehold stakes and relative sizeare no longer informative compared to the results in model (1). Interestingly, we find that the strength of

legal enforcement and the degree of creditor protections in the acquiring firm country become significantfactors in explaining the gains to target shareholders in regression model (3). In Table 5, the estimated

coefficients exhibited the same sign, but were not statistically significant.

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We suggest two possible explanations for this finding once control variables are introduced. First,creditor rights protections in the United States (as measured by LLSV, 1998) are weak compared to other

developed nations, and weaker than all acquirer firm countries in our sample but for France. Becausecreditor rights tend to remain in the same domicile as the physical location of the acquired assets (LLSV,

2000), our results may be capturing the value to acquiring firm shareholders of the opportunity for wealthexpropriation of target assets pledged to U.S. creditors. Consequently, acquirers bid higher premiums tocapitalize this opportunity, which is reflected in the negative relation between creditor rights and

acquiring firm shareholder returns. An alternate interpretation leading to the same conclusion followsfrom the agency cost contracting hypothesis. If managers are constrained to act in the creditors’ interest

when creditor protections are strong in the home country, managers can be willing to pay more for thegeographic diversity offered by cross-border assets.[19] In either case, our finding emphasizes that thelegal environment for both participating firms in a cross-border acquisition are relevant to the

shareholders of both firms; the valuation impact of corporate governance cannot be viewed with respectto one participant in isolation.[20]

Finally, we consider the variation in portfolio returns for the combined entity in (3) as a function of

the legal environment of the merged firms, transactional characteristics, and firm-specific qualities. Wedo not find evidence of traditional synergy value for merged firms in cross-border acquisitions. Business

relatedness is insignificant, while the level of target intangibles and the degree of managerial efficiencyare no longer significant compared to earlier models. In addition, we do not find that transactionalcharacteristics are a source of net value for merged firms. Instead, they comprise a zero-sum game for

target and acquirer shareholders, as argued in Jensen and Ruback (1983). We do find that acquiring firmshareholder protections remain positive and significant for portfolio returns after consideration of control

variables, consistent with the view that when managers are constrained to act in the shareholder’sinterests, agency costs are lower and managers pursue profitable acquisitions. Thus, corporate governancestructure and the legal environment in which firms operate has value in the marketplace as first argued in

LLSV (1997), and this value is capitalized into the revaluation of the newly-combined firm.The remaining factors in (3) that can explain the variation in portfolio returns are intriguing.

Namely, we find a positive and significant coefficient for opposed offers, in conjunction with a negativeand significant coefficient for targets incorporated in Delaware. If target firm management is entrenched,opposed offers can lower target shareholder wealth (e.g., Ryngaert, 1988), whereas successful

replacement of entrenched management can resolve this agency cost, resulting in more valuable mergedfirms. Given that the case law in Delaware is well-developed regarding anti-takeover provisions, and

generally supportive of target firm management in hostile transactions, are the results in Table 6 driven byopposed offers for Delaware firms? Our sample does not seem to be biased in this regard; the conditional

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frequency of opposed offers involving Delaware targets is not significantly different from the overallsample frequency for Delaware firms (p =.39 using a simple signed ranks test). Instead, if we introduce

the interaction term between Delaware and Opposed for the portfolio returns regression in model (3), wefind that the coefficient on Delaware becomes more negative (and significant at the 1% level), the

coefficient on Opposed becomes less positive and no longer significant at conventional levels, and theinteraction term is positive and marginally significant (p =.067). Thus, while merged firms involvingDelaware targets are less valuable, reflecting the higher premiums paid by acquiring firm management,

the merged firm is relatively more valuable when Delaware management opposes the offer. These resultsprovide the first empirical support for the arguments in Daines (2001) regarding the Delaware case law’s

facility for the sale of firms, in the specific application here of cross-border tender offers.

6. Conclusions

We examine whether the legal environment for foreign acquiring firms, as well as differential corporategovernance structure within the United States, can explain the gains to acquirers, targets, and newlycombined firms in the cross-border acquisition of U.S. companies via tender offer during the period

1982–1991. We provide evidence consistent with hypotheses advanced in the international corporategovernance literature, including Wurgler (2000) and LLSV (2000, 2002), that the degree of investor

protections in global capital markets are valued in cross-border tender offer transactions. We find that astrong rule of law and security owner protection mechanisms in the acquiring firm country act as asubstitute contracting mechanism for mitigating the classic agency costs of the firm. Acquiring firm

shareholders gain when their rights are protected, and combined firms are more valuable; when creditorrights are strong, acquiring firm shareholders earn lower returns and their U.S.-based targets gain. We

also find that differential legal structure within the United States, as captured by a firm’s state ofincorporation, has valuation consequences in cross-border tender offers. We document that foreignacquirers overpay for Delaware targets, and newly combined firms are less valuable as a result. When

intervening federal regulatory scrutiny occurs, we provide weak evidence that this imposes additionalcosts on foreign acquirers.

Our findings suggest several avenues for future research. First, an examination of the returns tocreditors in cross-border tender offers, particularly acquiring firm bondholders, would allow improvedtests for comparing the agency cost contracting, functional convergence, and firm value maximization

hypotheses. Second, the long-term performance of newly-combined firms, as a function of the legalenvironment and corporate governance structure under which it operates, would provide valuable insight

into the sustainable value created by security holder and stakeholder protection mechanisms. Third, theresults in Claessens, Djankov and Lang (2000) and Lins (2003) emphasizes the managerial control of the

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cash flow rights of the firm in the context of corporate governance structure and the legal environment.Should sufficient concentrated ownership data become available for foreign firms on an historical basis,

tests involving ownership structure would add to our findings in this paper. Finally, a more detailedexamination of federal regulatory review and target state of incorporation, perhaps in a case-based or

outcomes-based framework, would further our understanding of the value created by heterogeneouscorporate governance structure and legal environment within the United States.

Acknowledgements

An earlier version of this paper circulated under the title “Shareholder wealth effects in the cross-bordermarket for corporate control.” For their helpful comments and suggestions on earlier drafts, we would like

to thank Tom Berglund, Amy Dittmar, Lawrence Goldberg, Charles Himmelberg, Ajay Khorana, JinmoKim, Rafael La Porta, Bill Maxwell, Richard Pettway, Raghu Rau, Luc Renneboog and Laura Starks;

seminar participants at the Darden School, IESE University–Barcelona, Wake Forest University, SwedishSchool of Economics–Helsinki, University of Missouri, University of South Carolina, and Texas TechUniversity; and participants at the annual meetings of the Fortis/Georgia Tech Conference on

International Finance, Financial Management Association, European Financial Management Association,European Finance Association, and Southern Finance Association. We are also indebted to the editor

(Carl Chen) for his patience and encouragement. The third author thanks the Research FellowshipProgram at the Babcock School for partial support of this project. The usual disclaimer applies.

–23–

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Footnotes

1 Our sample period is inclusive of the announcement dates and sample transactions for most of theextant research in this area, including Harris and Ravenscraft (1991), Cebenoyan, Papaioannou andTravlos (1992), Marr, Mohta and Spivey (1993), Kang (1993), Pettway, Sicherman and Spiess(1993), Boebel, Harris and Parrino (1993), Swenson (1993), Servaes and Zenner (1994), Dewenter(1995a, 1995b), Cakici, Hessel and Tandon (1996) and Eun, Kolodny and Scheraga (1996), amongothers. In addition, our sample period is contained within the 1982–1995 period used to constructthe indices for legal enforcement, antidirector rights, and creditor rights in LLSV (1998), which weuse in our empirical analysis.

2 Miller (1999) documents that the announcement of an American Depositary Receipt (ADR) issuanceby foreign firms has a positive and significant effect on firm value; Bruner, Chaplinsky andRamchand (1999) find that the U.S. IPOs of foreign firms result in positive and significant increasesin the home-country equity value.

3 We focus on Delaware as more than half of all public U.S. firms are incorporated in that state, morethan ten times as many as the second largest concentration of incorporated firms (New York). Inaddition, the established case law in Delaware is more developed than in other states (particularlywith regards to takeovers) and its consequences have attracted particular attention in the legaleconomics literature. Although our control for this element of target firm legal structure is a crudeindicator variable approach, we note that it is sufficient to proxy for many aspects of heterogeneityin the legal environment within the United States. To provide one example, by the end of our sampleperiod 27 states had enacted “non-stockholder” constituency plans, which statutorily govern theduties of directors in the case of takeover to consider issues such as the economic impact on thecommunity, the interests of current and retired employees, creditors and suppliers, and wholly-owned or partially-owned local subsidiaries (e.g., Fla. Stat. Ann., Sec. 607.111.9; N.Y. Bus. Corp.Law, Sec. 717; Wis. Stat. Ann., Sec. 180.305). Notably, Delaware has not enacted such non-stockholder constituency plans.

4 Daines (2001) examines raw stock price merger premia for a sample of takeovers in the SDCdatabase and finds no significant difference for the premia earned by Delaware versus non-Delawareincorporated target firms. Our tests here, in the context of cross-border tender offers for U.S. firms,allow us to expand on this aspect of his findings in the context of abnormal returns, as well as toexamine the costs and benefits to the (foreign) acquiring shareholders and any revaluation associatedwith the newly-combined firm.

5 Our treatment of these regulatory costs is exploratory in nature. In our empirical design, we merelyindicate via a binary classification method whether the bids from potential foreign acquirers weresubject to federal review, or not. We make no attempt to control for the outcomes of the reviewprocess, the specific reviewing agency involved (e.g., the Departments of Defense, State, Justice,Treasury, Commerce, and others), or distinguish between transactions subject to cursory, as opposedto Exon-Florio, review. Since our sample is comprised entirely of successful tender offeracquisitions, the discriminatory power of the impact of federal regulation on cross-border takeoverswould be enhanced in a study that also examines unsuccessful foreign acquirer bids, and thosesubject to overt CFIUS opposition under the Exon-Florio law. We leave a more thorough treatmentof these cases for later research efforts.

6 We restrict our sample to tender offers primarily due to the greater disclosure requirements imposedon acquirers and targets during the transaction process (SEC 14-d1 and 14-d9); for many negotiatedmergers involving foreign firms, information coverage in the regular financial press is spotty, atbest. We note that Huang and Walkling (1987) and Franks, Harris and Mayer (1988) find no

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significant distinction between tender offer and merger transactions after controlling for method ofpayment and target management resistance, both of which we control for in our empirical tests.

7 Some of the firms in our sample remain listed in the U.S. after the offer is completed, since we donot screen off of the delisting date. This reflects our contention that the attainment of majority shareownership of a U.S. firm, and not the actual delisting of the target, denotes the relevant change incorporate control for valuation purposes. Nonetheless, most of the transactions involve completedelisting of the target—the median length of time between the announcement date of the last bid andthe delisting date is 31 days for firms in the final sample.

8 Compared to earlier studies, the number of transactions we report in Table 1 are slightly less thanthe number reported in Kang (1993), Dewenter (1995b), and Eun, Kolodny and Scheraga (1996).However, we note that our screening criteria rejects toehold acquisitions, cleanup offers, negotiatedmergers and asset divestitures—since we focus here on corporate control change events—whileprior studies are more focused on foreign direct investment capital flows, in general. Perhaps moredirectly, our data requirements are more stringent in this paper as we demand that both acquirer andtarget be publicly-traded with available returns data, and both acquirer and target have availableaccounting data in the year of the first announcement date.

9 For instance, the acquisition of MCA by Matsushita (Japan) for $7.95B in 1990, and the hostiletakeovers of Federated Department Stores by Campeau (Canada) for $7.42B and of Pillsbury byGrand Metropolitan (UK) for $5.78B, both in 1988. See Kaplan (1989) for a detailed exposition ofthe Federated takeover and Kaplan (1994) for an analysis of the factors leading to Campeau’ssubsequent bankruptcy.

10 We categorize an offer as hostile if The Wall Street Journal states that target management wasactively opposed to the bid, if we were able to clearly identify a white knight bidder that mentionsthe eventual winning foreign acquirer as a hostile suitor, and/or if SEC 14-d9 filings were availablethat stated management’s intent to oppose the offer.

11 For U.S. targets, we use the COMPUSTAT SIC listings in preference to those provided by CRSPbased on the results in Kahle and Walkling (1996). Foreign acquirer SIC codes are compiled in IDDMergers and Acquisitions and are meant to conform as closely as possible with the standard U.S.SIC system. Where this information was unavailable, we used the industry classifications reported inthe Extel and Worldscope databases and matched these descriptions as closely as possible with thosein the COMPUSTAT SIC listings. Our match criteria in assessing relatedness is at the 2-digit level.

12 For single bid offers, the announcement and effective dates are the same, so the window AD–20 toED+5 is fixed in length at 26 days. For the 67 multibid contests in our sample, this event windowwill vary in length. The median time between initial and final bid announcement dates (ED minusAD) in multibid offers is 22 days.

13 The results in Table 4 are not adjusted for base-year-constant U.S. dollars; the raw dollar gains inthe year and month of the transaction are reported. Given the non-normal character of the recordedwealth gains, nonparametric Wilcoxon signed ranks test statistics were also constructed for Table 4;the results are similar and omitted for brevity.

14 We note two important qualifications to the regression results in Table 5 that temper the strength ofour findings. First, our focus on successful cross-border tender offers, at least during the sampleperiod, necessarily means that we have little acquirer firm representation from emerging marketnations. Since agency costs are likely more severe for firms in developing economies (Demirguc-Kunt and Maksimovic, 1998), the discriminatory power of our results in this regard are weaker thandesired. Second, LLSV (2002) and Lins (2003) document that the role of legal environment,shareholder protections and creditor protections are strengthened to the degree that managers controlthe cash flow rights of the firm. Unfortunately, insider and block shareholdings data for the acquirer

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firms during our sample period are not reliably available. We leave this topic for later research andmore contemporaneous transactions data.

15 An additional point regarding the results for acquirer returns in Table 5 merits discussion. If thereexists unobserved, country-specific heterogeneity in returns for the acquirer firms in our sample notcaptured by the LLSV indices, the potential for a spurious regression can exist. Earlier research inthe area of cross-border acquisitions finds variation in returns as a function of the acquirer’s homecountry. In unreported regressions, we find that the acquirer returns in our sample also exhibitsignificant variation when employing a simple indicator variable approach for the countries reportedin Table 1, consistent with Dewenter (1995b), Eun, Kolodny and Scheraga (1996) and others.However, when we include these indicator variables in regression models (2) and (3) of Table 5along with the LLSV indices, the country-specific dummies are not jointly significant at normallevels (F = 0.98), whereas the significance for the LLSV variables as reported in Table 5 remainunchanged. We conclude that much of the acquirer home-country variation in returns documented inearlier research may simply be proxying for the variation in foreign country legal environment.

16 In unreported regressions, we do not find interaction terms between Delaware incorporation and theacquirer firm legal environment variables to be statistically significant.

17 We follow Swenson (1993) and investigate target intangibles, rather than the research anddevelopment (R&D) expense examined in some other cross-border acquisition studies, primarily dueto data constraints. COMPUSTAT does not reliably provide R&D expense line items for many firmson an historical basis, and moreover, there is a distinct industry bias with regards to the types offirms with reported R&D of any kind. To avoid this potential bias and increase the coverage of firmsin our regression analysis, we instead focus on intangible assets, which are highly correlated withR&D and available for nearly all the firms in our sample.

18 Our conclusions are unchanged under any of the alternate measures for real exchange rate deviationsas explored in Harris and Ravenscraft (1991) and elsewhere. To control for potential aggregationbias in our sample that may obscure the tax effect, we also estimate a fixed-effects model usingannual dummies, following the time distribution shown in Table 1. For either of regression models(2) or (3) in Table 6, the time dummies are not jointly significant at conventional levels.

19 The asset diversity offered by unrelated or conglomerate cross-border takeovers, and presumablyvalued by the creditors of the acquiring firm due to the reduced cash flow risk, does not impact thegains to takeover nor the value of the combined firm, as we do not find business relatedness (or itsBoolean-opposite, business diversity) to be significant in any regression in Table 6. Nor do we find(unreported) interaction terms between relatedness (diversity) and the LLSV indices to besignificant. With respect to geographical diversity, it has been suggested that the existence of priorbusiness operations or asset ownership in the U.S. by the foreign acquirer can capture this effect(Harris and Ravenscraft, 1991). If so, the interaction between prior U.S. operations and the LLSVprotection indices (in particular, creditor rights) could be informative. Unfortunately, the ability toaccurately measure the existence of prior U.S. operations for the foreign acquirers in our sample ispoor using the available data sources. Moreover, it is not clear to us what constitutes a materialdegree of prior presence from the perspective of the acquiring firm creditors.

20 We note the possibility that our finding of a significant effect for acquiring firm creditor rightsprotections and strength of legal enforcement may be spurious, in that it captures endogeneitybetween Tobin’s q and the LLSV corporate governance indices. LLSV (2000), Lins (2003) andothers find that firm value as measured by q is positively associated with security holder protectionsand the strength of legal enforcement within countries. However, if we omit Tobin’s q from model(3) and re-estimate the model for target returns, the variables Law, Creditor, and Creditor*Lawremain significant. Conversely, if we estimate regression models (1) and (2) together, without theLLSV variables, target and acquirer q remain significant with the same sign.

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Table 1Successful cross-border tender offers for U.S. firms, 1982–1991

Panel A: Tender offers by industry and acquiring firm country

Canada France Germany Japan Switz. U.K. Others‡ TotalFinished goods (SIC=20,22,23,26,27) 3 1 1 2 3 10 7 27Chemicals (SIC=28) 0 3 2 5 2 1 6 19Machinery & indust. equip. (SIC=35) 1 0 2 4 2 9 7 25Electricals & elec. devices (SIC=36,38) 1 3 1 4 3 16 4 32Retail & wholesale trade (SIC=5X) 4 2 1 0 0 12 5 24Services (SIC=7X,8X) 1 1 2 2 1 13 2 22Others† 3 6 0 2 1 15 5 32Total 13 16 9 19 12 76 36 181

Panel B: Tender offers bids over time

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 TotalNumber of deals 12 2 13 5 26 23 44 34 18 4 181

The table reports the distribution of successful foreign acquisitions of U.S. targets via tender offer duringthe period 1982–1991, stratified by target industry and foreign acquirer nationality (Panel A) and the firstannouncement date (Panel B). Target industry SIC classifications at the two-digit level are fromCOMPUSTAT; listings in the table with an X in the second digit imply all classifications 0–9, inclusive.Acquirer nationality is based on the home country of the corporate headquarters or the primary listingexchange, with precedence given to the listing exchange. For the time series of cross-border tender offersin Panel B, deals are classified according to the first announcement date of a bid for the target, whether ornot the first bid is made by the ultimate acquirer.

Others†: SIC classifications 10, 13, 14, 29, 30, 32, 33, 34, 37, 39Others‡: Australia (8), Sweden (7), Italy (6), Netherlands (6), New Zealand (3), Belgium (2),

Denmark (1), Luxembourg (1), Mexico (1), Taiwan (1)

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Table 2Deal- and firm-related characteristics of successful cross-border tender offers, 1982–1991

Canada France Germany Japan Switzerland U.K. Others‡ TotalPanel A: Deal-related variablesDeal size ($MM) 966.10 985.32 512.87 834.96 749.69 371.62 288.80 532.82Merger premium (%) 40.02 78.02 68.09 53.36 39.55 48.17 39.78 49.52Previous stake (%) 0.00 5.85 3.67 1.68 1.57 1.26 6.22 2.75Related 69.23 56.25 44.44 47.37 66.67 56.58 58.33 56.91Multiple bids 46.15 50.00 22.22 31.58 33.33 36.84 36.11 37.02Opposed 38.46 25.00 11.11 15.79 8.33 23.68 13.89 20.44Stock payment 23.08 18.75 11.11 10.53 25.00 6.58 2.78 9.94Regulated 46.15 81.25 66.67 89.47 58.33 65.79 50.00 64.64Delaware 53.85 25.00 44.44 63.16 58.33 48.68 41.67 47.51

Panel B: Firm-related variablesTarget sales ($B) 1.31 0.64 0.66 0.61 0.70 0.44 0.31 0.54Acquirer sales ($B) 1.01 6.96 12.73 11.36 9.68 3.45 3.06 5.32Target assets ($B) 0.77 0.68 0.49 0.58 0.51 0.29 0.26 0.41Acquirer assets ($B) 0.99 7.81 11.78 10.22 10.56 3.12 3.70 5.26Target debt/assets 0.53 0.55 0.50 0.46 0.43 0.52 0.47 0.50Acquirer debt/assets 0.29 0.24 0.13 0.27 0.16 0.21 0.32 0.24Target q 0.77 0.57 0.45 1.23 2.12 1.03 1.02 1.04Acquirer q 1.16 0.71 0.90 1.27 0.41 0.98 0.57 0.89Target intangibles/assets (%) 2.53 3.84 2.30 2.92 3.49 4.19 5.83 4.13Acquirer intangibles/assets (%) 7.78 4.78 2.82 9.07 3.92 1.55 10.27 4.94

The table reports the mean for deal- and firm-related variables, stratified by foreign acquirer nationality,for targets and acquirers involved in 181 successful cross-border tender offers during the period1982–1991. In Panel A, the entries for related firms, multiple bids, opposed offers, stock payment, offersrequiring U.S. regulatory approval, and targets incorporated in Delaware, are reported in the table as thepercentage of all deals involving the acquirer country in that column. In Panel B, the Tobin’s q variable iscalculated using the “approximate q” method outlined in Chung and Pruitt (1994).

Others‡: Australia (8), Sweden (7), Italy (6), Netherlands (6), New Zealand (3), Belgium (2),Denmark (1), Luxembourg (1), Mexico (1), Taiwan (1)

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Table 3U.S. target, foreign acquirer, and portfolio cumulative abnormal returns (CARs)

U.S. Target ( N = 181) Foreign Acquirer ( N = 138) Portfolio ( N =120)CAR (%) Z CAR (%) Z CAR (%) Z

(AD–20, ED+5) 35.83 36.40*** –2.12 2.05** 5.03 5.16***(AD–5, ED+5) 32.22 43.33*** –2.14 2.97*** 4.27 5.01***(AD–5, AD+5) 29.43 49.93*** –1.32 3.80*** 3.77 7.51***(AD–20, AD–6) 3.60 5.71*** –0.06 0.51 0.75 1.66*(AD–1, AD 0) 23.07 95.10*** –0.92 5.82*** 2.99 14.41***

The table reports the cumulative abnormal return (CAR) over various event windows for U.S. targets,foreign acquirers, and the portfolio of target and acquirer returns for 181 successful cross-border tenderoffers during the period 1982–1991. AD is the first announcement date of any bid for the U.S. target, andthe announcement date of the acquirer’s first bid for foreign acquirers. ED is the corresponding effectivedate of the final bid for the target; this date is the same as AD for single-bid offers. Portfolio CARs arecalculated as the market value-weighted average of target and acquirer CARs as in Bradley, Desai andKim (1988). The test statistic for significance is the Z-statistic from Mikkelson and Partch (1988).

*** Indicates significance at the .01 level** Indicates significance at the .05 level* Indicates significance at the .10 level

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Table 4Division of wealth gains in cross-border tender offers, 1982–1991

U.S. Target ( N = 181) Foreign Acquirer ( N = 138) Portfolio ( N =120)!Wealth t-statistic !Wealth t-statistic !Wealth t-statistic

Canada 219.14 1.47 –17.96 0.66 14.86 0.35France 161.64 3.08*** 47.98 1.29 296.41 2.88**Germany 64.42 2.12* –285.89 1.14 –199.68 0.93Japan 231.92 2.03* –102.89 1.01 131.83 1.44Switzerland 182.51 2.62** 184.23 1.16 387.21 2.60**U.K. 96.83 3.09*** –51.15 1.62 65.47 2.44**Others‡ 57.94 2.43** 23.12 0.54 59.98 1.34

Total 121.86 5.45*** –31.26 1.09 102.89 3.70***

The table reports the U.S. dollar-valued ($MM) abnormal wealth gains for U.S. targets, foreign acquirers,and the portfolio of target and acquirer for 181 successful cross-border tender offers during the period1982–1991. Wealth gains are calculated as the product of the respective target, acquirer, or portfolio CARover the event window (AD–20, ED+5) with the respective market value of equity (Bradley, Desai andKim, 1988); target equity is net of any initial acquirer stake. Foreign equity value is calculated as themarket capitalization of the acquirer 20 days before its first bid, converted to a dollar-value equivalentusing the exchange rate during the month of the bid; exchange rates are from the Citibase monthly files.

Others‡: Australia (8), Sweden (7), Italy (6), Netherlands (6), New Zealand (3), Belgium (2),Denmark (1), Luxembourg (1), Mexico (1), Taiwan (1)

*** Indicates significance at the .01 level** Indicates significance at the .05 level* Indicates significance at the .10 level

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Table 5Regression analysis of the returns in cross-border tender offers: The legal environment

U.S. Target CAR ( N = 181) Foreign Acquirer CAR ( N = 138) Portfolio CAR ( N = 120)(1) (2) (3) (1) (2) (3) (1) (2) (3)

Constant 1.398*** 0.270 0.301 –0.230** 0.228 0.110 –0.057 –0.487 –0.529(0.189) (0.587) (0.587) (0.106) (0.424) (0.421) (0.130) (0.495) (0.504)

Law –0.120*** 0.016 0.006 0.023** –0.025 –0.009 0.011 0.057 0.063(0.020) (0.064) (0.065) (0.012) (0.047) (0.047) (0.014) (0.055) (0.056)

Share 0.159 0.098 0.156* 0.145* 0.294*** 0.280***(0.188) (0.190) (0.085) (0.084) (0.108) (0.109)

Share*Law –0.019 –0.012 –0.017* –0.016* –0.031*** –0.030**(0.020) (0.020) (0.009) (0.009) (0.012) (0.012)

Creditor 0.311 0.322 –0.469** –0.408* –0.256 –0.221(0.211) (0.217) (0.225) (0.224) (0.263) (0.269)

Creditor*Law –0.037 –0.038 0.051** 0.045* 0.027 0.023(0.023) (0.024) (0.025) (0.025) (0.030) (0.030)

Delaware 0.030 –0.043*** –0.024(0.033) (0.015) (0.018)

Regulated 0.061* –0.006 0.001(0.034) (0.016) (0.020)

Adjusted R2 0.157 0.190 0.202 0.021 0.068 0.114 0.000 0.035 0.034

The table reports the results of weighted, least-squares regression tests for the role of the legalenvironment and corporate governance structure of transacting firms in explaining the cumulativeabnormal returns (CARs) for U.S. targets, foreign acquirers, and the portfolio of target-acquirer returnsfor 181 successful cross-border tender offers during the period 1982–1991. Explanatory variables in theregression models are indices for the rule of law (Law), and the degree of shareholder (Share) and creditor(Creditor) rights from LLSV (1998), along with dummies for U.S. targets incorporated in Delaware(Delaware) and tender offers that require U.S. regulatory approval (Regulated). Target and acquirerregressions are weighted by the reciprocal of the square root of the market model residual variance, withthe market value-weighted average of the residual variances used in the portfolio regressions, in each caseto control for heteroskedastic effects in the panel data. Standard errors are shown in parentheses.

*** Indicates significance at the .01 level** Indicates significance at the .05 level* Indicates significance at the .10 level

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Table 6Regression analysis of the returns in cross-border tender offers: The legal environment and control variables

U.S. Target CAR Foreign Acquirer CAR Portfolio CAR(1) (2) (3) (1) (2) (3) (1) (2) (3)

Constant 0.311*** 0.308*** –1.966 –0.008 –0.005 0.393 0.030** 0.057*** –0.547(0.024) (0.036) (1.242) (0.011) (0.018) (0.495) (0.012) (0.021) (0.582)

Law 0.246* –0.035 0.063(0.136) (0.054) (0.064)

Share 0.063 0.239** 0.259**(0.296) (0.106) (0.129)

Share*Law –0.008 –0.026** –0.027*(0.032) (0.011) (0.014)

Creditor 1.030** –0.705*** –0.309(0.488) (0.256) (0.299)

Creditor*Law –0.114** 0.078*** 0.034(0.055) (0.029) (0.034)

Delaware –0.005 –0.042*** –0.040**(0.039) (0.016) (0.019)

Regulated –0.012 –0.031* 0.013(0.043) (0.017) (0.022)

MultBids 0.125*** 0.138*** –0.046** –0.033 0.016 –0.007(0.044) (0.050) (0.020) (0.021) (0.022) (0.025)

PrevStak –0.683*** –0.301 –0.015 –0.046 –0.112 –0.067(0.129) (0.277) (0.097) (0.097) (0.103) (0.118)

StockPmt 0.060 0.032 –0.002 0.006 0.017 0.028(0.056) (0.061) (0.027) (0.027) (0.029) (0.033)

Opposed –0.080 –0.082 0.030 0.024 0.052* 0.076**(0.049) (0.054) (0.025) (0.025) (0.027) (0.029)

RelSize 0.086** 0.025 0.001 –0.021 –0.012 –0.024(0.034) (0.056) (0.021) (0.024) (0.021) (0.027)

USIntang 0.837*** 0.647** –0.035 –0.109 0.238* 0.193(0.294) (0.313) (0.119) (0.113) (0.141) (0.137)

USqHi –0.116*** –0.136*** 0.005 0.002 –0.019 –0.020(0.038) (0.045) (0.017) (0.018) (0.021) (0.023)

FXqHi 0.075* 0.096** –0.025 –0.018 –0.035* –0.005(0.042) (0.048) (0.018) (0.018) (0.021) (0.022)

Related 0.030 0.048 –0.008 –0.018 0.013 0.007(0.037) (0.039) (0.016) (0.016) (0.019) (0.019)

PreTax –0.065 0.007 0.009 –0.019 –0.027 –0.008(0.062) (0.076) (0.027) (0.030) (0.033) (0.038)

EXRate 0.036 0.287 0.026 –0.085 –0.191 –0.217(0.236) (0.293) (0.111) (0.117) (0.132) (0.144)

Adjusted R2 0.189 0.163 0.176 0.003 0.000 0.159 0.060 0.042 0.178

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Table 6 (continued)

The table reports the results of weighted, least-squares regression tests for the role of the legalenvironment and corporate governance structure of transacting firms in explaining the cumulativeabnormal returns (CARs) for U.S. targets, foreign acquirers, and the portfolio of target-acquirer returnsfor 181 successful cross-border tender offers during the period 1982–1991, after controlling for deal-specific characteristics of the takeover and capital market imperfections. Explanatory variables in theregression models are indices for the rule of law (Law), and the degree of shareholder (Share) and creditor(Creditor) rights from LLSV (1998), along with dummies for U.S. targets incorporated in Delaware(Delaware) and tender offers that require U.S. regulatory approval (Regulated). Control variables includethe deal-specific regressors MultBids (dummy variable equal to one if more than one bid is made for thetarget), PrevStak (the percentage of target shares held by the acquirer prior to its first bid), StockPmt(dummy variable equal to one if any acquiring firm stock is used to finance the acquisition), Opposed(dummy variable equal to one if target management actively opposes the offer), and RelSize (ratio oftarget to acquirer total assets). To control for capital market imperfections, additional regressors areUSIntang (proportion of target firm total assets booked as intangibles), USqHi (dummy variable equal toone if the target’s q ratio is greater than one), FXqHi (dummy variable equal to one if the acquirer’s qratio is greater than one), Related (dummy variable equal to one if both firms are in the same 2-digit SICclassification), PreTax (dummy variable equal to one for acquisitions with first bid dates prior to January1, 1987), and EXRate (exchange rate short-term to long-term percentage deviation in the month of theacquiring firm’s first bid, constructed as in Harris and Ravenscraft, 1991). Target and acquirer regressionsare weighted by the reciprocal of the square root of the market model residual variance, with the marketvalue-weighted average of the residual variances used in the portfolio regressions, in each case to controlfor heteroskedastic effects in the panel data. Standard errors are shown in parentheses.

*** Indicates significance at the .01 level** Indicates significance at the .05 level* Indicates significance at the .10 level