Acquirers and financial constraints: Theory and evidence from emerging markets. (October 2021)

• Record Type: Journal Article
• Authors: Mukherjee, Rahul; Proebsting, Christian
• Is Part Of: Journal of international money and finance. Volume 117(2021)
• Publication Date: 2021-10
• Subjects: Domestic mergers and acquisitions -- Cross-border mergers and acquisitions -- Emerging markets -- Financial crisis -- Financial constraints -- Capital reallocation; F21 -- G01 -- G34; International finance -- Periodicals; Foreign exchange -- Periodicals; Finances internationales -- Périodiques; Change -- Périodiques; Foreign exchange; International finance; Periodicals; 332.04205
• DOI: 10.1016/j.jimonfin.2021.102440
• Languages: English
• ISSNs: 0261-5606

Abstract

Highlights: Model of acquisitions where domestic acquirers are subject to borrowing constraints. Predicts fire-sales and novel counteracting selection effect for domestic acquirers. Regression evidence on stakes and divestitures supports theoretical predictions. Selection effect contributes to 12% rise in stakes and 30% fall in divestiture rate. Abstract: Financial crises in emerging market economies induce diverging patterns of ownership stakes and subsequent divestiture rates among domestic and foreign acquirers. We rationalize these empirical findings in a tractable model where domestic acquirers are subject to borrowing constraints. In contrast to standard fire-sale effects operating for acquisitions by foreign acquirers, acquisition patterns of domestic firms are shaped by a novel counteracting selection effect, resulting in larger acquired stakes and more persistent ownership. We present empirical evidence consistent with the model's predictions using a large dataset of domestic and cross-border emerging market acquisitions over 1990–2007. The estimated contribution of selection effects is quantitatively significant, leading to 12% increases in stakes, 25% increases in full acquisitions, and 30% declines in divestiture rates among crisis-time domestic acquisitions. Our results demonstrate how financial crises can have both short- and long-run effects through the market for corporate control, by changing the set of acquirers and how long acquirers keep ownership.