International Business Review 25 (2016) 471–483

Do cross-border acquisitions create value? Evidence from overseasacquisitions by Chinese firms

Jiatao Li a, Peixin Li b,*, Baolian Wang c

a Chair Professor and Head, Department of Management, and Senior Associate Dean, School of Business and Management,

Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kongb Business School, Central University of Finance and Economics, Beijing 100081, Chinac Department of Finance, Fordham University, New York, United States

A R T I C L E I N F O

Article history:

Received 6 May 2013

Received in revised form 9 June 2015

Accepted 4 August 2015

Available online 4 September 2015

Keywords:

Cross-border acquisitions

Cultural distance

Emerging economies

Value creation

A B S T R A C T

Based on the dynamic capability and organizational learning perspectives, we examine whether

acquirers from emerging economies can create value for their shareholders in cross-border mergers and

acquisitions, and the key drivers which may influence any such value creation. A sample of 367 cross-

border mergers and acquisitions between 2000 and 2011 involving Chinese listed companies as the

acquirers was analyzed to highlight the relationship between the cultural distance involved and the

acquirers’ market valuation. On average, such cross-border transactions created value for the acquirer’s

shareholders, but cultural distance was negatively related to the extent of such value creation. Larger

firms, more experienced firms, and acquisitions within the same industry were found to be less affected

by cultural distance, emphasizing the importance of learning and absorptive capability, but employing a

financial advisor did not seem to help. Thus firms with greater absorptive capacity were found better

able to overcome the difficulties caused by cultural differences. Implications for research and practice are

discussed.

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1. Introduction

There has been extensive research on whether cross-bordermergers and acquisitions (M&As) create or destroy value for theshareholders of the acquiring firms, but the findings from thisstream of research have not been consistent. For example, Cakici,Hessel, and Tandon (1996), Doukas and Travlos (1988), Eun,Kolodny, and Scheraga (1996), Goergen and Renneboog (2004), agroup led by Gubbi (Gubbi, Aulakh, Ray, Sarkar, & Chittoor, 2010),Markides and Ittner (1994), and Markides and Oyon (1998) foundthat the acquirers’ stock price responded positively to theannouncement of a cross-border acquisition, while Chakrabarti,Gupta-Mukherjee, and Jayaraman (2009) and Datta and Puia(1995) found a negative effect. Datta, Pinches, and Narayanan(1992) found no significant market reaction, but Conn and Connell(1990) found that the result is sensitive to the model used, andReus and Lamont (2009) found that value creation depends on theabsorptive capability of the acquiring firm. While there could bemany explanations about the inconsistency in the findings fromthis stream of work, one reason could be the different national

* Corresponding author.

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contexts where these studies were conducted and the methodsapplied. For example, while the majority of prior studies examineddomestic mergers and acquisitions, some other studies examinedcross-border M&As (Gubbi et al., 2010; Krug & Hegarty, 2001).There are differences in regulation (e.g., openness and taxes,Chakrabarti, 2001), investment opportunities (e.g., higher qualityof resources in developed economies, Gubbi et al., 2010), andmotivations for acquisitions. For example, multinationals fromdeveloped economies are more likely to exploit their existingassets (Makino, Lau, & Yeh, 2002), while many Chinese multi-nationals are more attracted by strategic assets not available athome (Deng, 2009; Luo & Tung, 2007). The inconsistent findingsmay also suggest the importance of considering the specificcontext.

While many of the prior studies have examined the actions ofacquirers from developed economies (e.g., Barmeyer & Mayrhofer,2008; Conn & Connell, 1990; Datta & Puia, 1995; Doukas & Travlos,1988; Eun et al., 1996), a growing number of studies have begun toexamine the phenomenon of M&As by acquirers from emergingeconomies (Aybar & Ficici, 2009; Bhagat, Malhotra, & Zhu, 2011;Boateng, Wang, & Yang, 2008; Chen & Young, 2010; Gubbi et al.,2010; Ning, Kuo, Strange, & Wang, 2014). ‘‘Emerging economies’’here refers to less developed economies which have high growth

J. Li et al. / International Business Review 25 (2016) 471–483472

potential and government policies favoring economic liberaliza-tion and the adoption of a free-market system (Arnold & Quelch,1998; Hoskisson, Eden, Lau, & Wright, 2000). Some of those studies(for example, Chen & Young, 2010; Ning et al., 2014) have foundpositive stock price reactions while others (for example, Aybar &Ficici, 2009) have found the opposite.

Cross-border acquisitions by acquirers from emerging econo-mies have usually been driven either by the quest for strategicresources overseas, such as a new technology, brand, talent,distribution channels, natural resources, or by the need to avoidinstitutional constraints at home (Child & Rodrigues, 2005; Deng,2007; Luo & Tung, 2007; Rui & Yip, 2008). In order to catch up,acquirers from emerging economies have to learn, reconfiguretheir resources, and enhance their dynamic capabilities (Kogut &Zander, 1992; Teece, Pisano, & Shuen, 1997). This involves asignificant amount of knowledge transfer, much of which isembedded in the society or people of the host country. Further-more, compared with multinationals from more developedeconomies, new multinationals from emerging economies wouldlack the experience necessary for success in international businessand their performance may be negatively affected (Haleblian &Finkelstein, 1999).

This study examined three research questions. First, to whatextent acquirers from emerging economies can consistently createvalue for their shareholders in cross-border M&As. Second,whether the cultural distance between the home countries ofthe acquirer and target affects any such value creation wasexamined. Third, how the absorptive capability of the acquiringcompany can influence the relationship between cultural distanceand value creation was considered.

In exploring what factors affect acquirers’ performance in cross-border acquisitions, this study focused on cultural distancebetween the acquirer’s and the target firm’s home countries.Cultural distance is known to be an important factor ininternational business (Datta & Puia, 1995; Kim & Hwang, 1992;Kogut & Singh, 1988; Lee, Shenkar, & Li, 2008; Leung, Bhagat,Buchan, Erez, & Gibson, 2005; Li, Karakowsky, & Lam, 2002;Shenkar, 2012; Sirmon & Lane, 2004; Vaara, Sarala, Stahl, &Bjorkman, 2012), and it is often cited as an impediment tointegrating cross-border acquisitions (Datta & Puia, 1995; Mor-osini, Shane, & Singh, 1998). Given that multinationals fromemerging economies typically lack international experience andtend to learn in the process rather than exploit their existingknowledge, they may be particularly affected by cultural distance.

The dynamic capability and the organizational learningperspectives (Cohen & Levinthal, 1990; Kogut & Zander, 1992;Lane, Salk, & Lyles, 2001) emphasize the heterogeneity in firms’absorptive capacity. Absorptive capacity in this context refers to‘‘. . .an ability to recognize the value of new information, assimilateit, and apply it to commercial ends’’ (Cohen & Levinthal, 1990: p.128). As many previous studies (e.g. Lin & Germain, 1998) havedocumented, cultural distance can impede knowledge transfer.Therefore, this study also investigated how the negative effect ofcultural distance might be mitigated to some extent by a firm’sabsorptive capabilities. The intention is to shed additional light onthe key factors that affect the performance of cross-border M&Asby emerging economy firms.

Based on the dynamic capability and organizational learningperspectives, we examine whether acquirers from emergingeconomies can create value for their shareholders in cross-borderM&As, and the key drivers which may influence any such valuecreation. A sample of 367 cross-border mergers and acquisitionsbetween 2000 and 2011 involving Chinese listed companies as theacquirers was analyzed to highlight the relationship between thecultural distance involved and the acquirers’ market valuation. Onaverage, such cross-border transactions created value for the

acquirer’s shareholders, but cultural distance was negativelyrelated to the extent of such value creation. Emphasizing the roleof learning and absorptive capability, we found that large firms,experienced firms, and non-diversified acquisitions were lessaffected by cultural distance, but employing financial advisors didnot seem to help.

This research was intended to make the following contribu-tions. First, it adds to an emerging stream of scholarly workexamining the impact of cultural distance on cross-borderacquisitions by new multinationals from emerging economies.There are considerable differences between acquirers fromemerging economies and those from more developed economies.For example, many acquirers from developed economies tend toexploit their existing assets, while those from emerging economiesare more likely to seek new strategic assets. Although both wouldinvolve knowledge transfer, the latter would be more challenging.Therefore, the effect of cultural distance could be even moreimportant for cross-border acquisitions by firms from emergingeconomies.

Second, emphasizing the role of learning and absorptivecapability, we have also identified several firm-level factors thatcan mitigate the negative relationship between cultural distanceand value creation in cross-border acquisitions. In particular, firmswith greater absorptive capacity were found better able toovercome the difficulties caused by cultural differences.

Cross-border acquisitions by acquirers from emerging econo-mies are more likely to be driven by the motivation of acquiringstrategic assets that can help them build or enhance competitiveadvantage. Most such assets are intangible in nature—technology,management skills, human capital, and so on. Communicatingintangible information is exposed to cultural conflicts. This studyinvestigated how cultural distance affects the performance ofChinese acquiring firms and how firms can mitigate any negativeeffect. Chinese culture emphasizes long-term orientation muchmore than Western cultures (Hofstede, Hofstede, & Minkov, 2010).That makes China a good context for such a study. Furthermore,China is representative in terms of its development level and themotivation for cross-border M&As (Luo & Tung, 2007). Such M&Ashave become popular in recent years, but Chinese acquirers are stillat the initial stage of internationalization, similar to otheremerging economies. This is a relatively new phenomenon whichhas not been extensively studied thus far (see several recentexceptions by Gubbi et al., 2010; Lin, Peng, Yang, & Sun, 2009; Ninget al., 2014; Yang, Sun, Lin, & Peng, 2011). This study thereforecontributes to this new research area, and the practical implica-tions of its findings are discussed in the final section of this paper.

2. Theoretical background

2.1. Cross-border M&As

Mergers and acquisitions are an important entry strategy forforeign direct investment, and they are normally motivated by thesame strategic considerations and potential benefits that driveother foreign direct investment decisions, e.g., to better exploit afirm’s assets, to strategically enhance its competitive advantagesand to diversify risk. Firms with superior assets may seek to expandtheir operations internationally to better utilize firm-specificassets such as superior products, technology, management skills,marketing channels, economies of scale or scope, better corporategovernance, or even special government incentives (Bris & Cabolis,2008; Errunza & Senbet, 1981). Such proprietary and intangiblefirm-specific assets can provide a foreign acquirer better profitpotential than a local potential bidder for the same target (Bris &Cabolis, 2008; Dunning, 1988; Krugman, 1987; Martynova &Renneboog, 2008).

J. Li et al. / International Business Review 25 (2016) 471–483 473

Studies have also recognized that firms invest in foreign marketsnot only for asset exploitation but also for strategic asset seeking: todevelop or enhance their competitive advantages (Chang, 1995;Dunning, 1993; Makino et al., 2002). This is particularly true formultinational companies from emerging economies. Such firmstend to be latecomers with inferior technology, brands, and othertangible and intangible resources. Those assets may be difficult todevelop internally as the general innovation environment, both theinstitutional environment like property rights protection andinfrastructure like a network of innovative companies, may stillbe under-developed. Going abroad therefore can help overcomelatecomer disadvantages and alleviate domestic institutionalconstraints (Luo, 1998). By integrating and leveraging corecompetences abroad, multinational companies from emergingeconomies can explore new opportunities in international markets(Luo & Tung, 2007).

The dynamic capability theory of firms emphasizes how firmslearn and reconfigure their resources (Kogut & Zander, 1992; Teeceet al., 1997). Knowledge is not always easy to learn, especiallyknowledge embedded in an organization (Coff, 1999; Gupta &Govindarajan, 2000). Both asset exploitation and strategic assetseeking involve learning, and learning is important for companies’repositioning in a globalized market (Liu & Zhang, 2014).Regardless of the motivations, multinational companies need togain information about the host country, such as information onlocal governments, partners, suppliers and customers. Embeddedknowledge cannot be efficiently transferred through markettransactions (Coff, 1999), but a cross-border merger or acquisitioncan provide one way to overcome this inefficiency (Capron,Dussauge, & Mitchell, 1998).

International business scholars have emphasized culturaldistance as an important factor in international business (Datta& Puia, 1995; Kogut & Singh, 1988; Lee et al., 2008; Shenkar, 2012;Vaara et al., 2012), and it is often cited as an impediment tolearning in cross-border M&As (Datta & Puia, 1995; Morosini et al.,1998). Through increasing the communication costs between theacquirer and the target company, cultural distance increases thedifficulty of information sharing and knowledge exchange.

2.2. Cultural distance

‘‘Culture consists of the unwritten rules of the social game. It isthe collective programming of the mind that distinguishes themembers of one group or category of people from others’’(Hofstede et al., 2010, p. 6). Cultural distance is gauged to measurethe differences between different cultural groups, usuallybetween different countries. Cultural distance can come frommany sources, like history, religion, and linguistic differences(Kogut & Singh, 1988; Riad & Vaara, 2011). Culture has severaldimensions, such as power distance, individualism vs. collectiv-ism, uncertainty avoidance, masculinity vs. femininity, and long-term vs. short-term orientation (Hofstede et al., 2010). Scholarshave also proposed several other ways of classifying culture’sdimensions. For example, the GLOBE project sought to refineHofstede’s cultural dimensions and classified cultures using ninedimensions (House et al., 2004). It included some dimensions incommon with Hofstede’s such as uncertainty avoidance andpower distance, but it refined the individualism/collectivismdimension into in-group collectivism and institutional collectiv-ism, and separated masculinity into gender egalitarianism andassertiveness. GLOBE also included new dimensions such asfuture orientation, performance orientation and human orienta-tion. Culture theorists have proposed that cultural dimensionsmatter for international business (Hofstede et al., 2010; Houseet al., 2004; Trompenaars & Hampden-Turner, 1998). Nations canbe different in one or more cultural dimensions, and clashes can

occur if cultural distance is not managed effectively (Hofstedeet al., 2010).

Culture scholars have discussed how cultural difference affectscross-border M&A outcomes, especially in terms of knowledgeexchange (Hofstede et al., 2010; Trompenaars & Hampden-Turner,1998). Trompenaars and Hampden-Turner have provided exam-ples of how people from different cultural backgrounds deal withrelationships and rules and the effects on M&A negotiations andintegration (pp. 31–32 and 40–41). Hofstede (pp. 408–409) hasexplicitly discussed why cultural differences can negatively affectvalue creation through its negative effect on the retention of keypeople from the acquired company. ‘‘. . .[C]ultural clashes are oftenresolved by brute power: key people are replaced by thecorporation’s own men and women. In other cases key peoplehave not waited for this to happen and have left on their ownaccount.’’ (Hofstede et al., 2010, p. 408).

In many M&As integration is a key goal and knowledgeexchange is an essential component (Hofstede et al., 2010; Javidan,Stahl, Brodbeck, & Wilderom, 2005; Weber, Shenkar, & Raveh,1996). Knowledge exchange in a cross-border merger or acquisi-tion often refers primarily to operational methods, know-how, andfeedback regarding products and procedures (Javidan et al., 2005).Cultural distance usually impedes such exchanges because ofdifferent norms of behavior (Lin & Germain, 1998). Specifically, in asurvey of managers in cross-border acquisitions, the managersfrequently mentioned problems arising from poor communica-tions owing to cultural barriers (DeLong & Fahey, 2000). In anymerger or acquisition the managers from both companies typicallyhave intensive interaction, and this makes cultural differenceseven more salient (Sales & Mirvis, 1984).

Cultural differences tend to impede learning, leading to highercosts of information acquisition, knowledge transfer (Malik & Zhao,2013) or even the breakdown of communications (Rao & Schmidt,1998). People from distant national cultures have been shown tobe less likely to trust each other (Doney, Cannon, & Mullen, 1998).It is hard to transfer intangible firm-specific assets to a relativelymore distant culture (Brock, 2005; Geringer, Beamish, & daCosta,1989). The difficulty in information acquisition and knowledgetransfer can contribute to an asymmetric information problem atthe initial valuation stage (Hennart & Reddy, 1997). It can lead tomore management resistance when negotiating interculturaltransactions (Weber et al., 1996). Both will affect the performanceof the combined firms.

Cultural distance also affects post-acquisition integration(Reuer & Koza, 2000). For example, different cultures havedifferent administrative routines, making managerial skills diffi-cult to transfer from one firm to another in a cross-border mergeror acquisition. Limited cross-cultural understanding can lead tomisunderstandings about assignments (Heiman, Li, Chan, &Aceves, 2008; Heiman & Nickerson, 2004; Oxley, 1997). Comparedwith domestic M&As, target company executives are more likely toleave the firm after a cross-border merger or acquisition. Ifvaluable knowledge is embedded in those executives, as is veryoften the case (Hofstede et al., 2010), losing them will have asignificant negative effect on learning. Jemison and Sitkin (1986)have shown that ‘‘culture ambiguity’’ is more likely in post-acquisition integration when there was a big cultural distancebetween the original firms and greater cultural distance leads tomore day-to-day operating conflicts during the post-acquisitionperiod.

National cultures also influence organizational characteristicsand practices (Sirmon & Lane, 2004). Empirical studies testing therelationship between corporate cultural differences and acquisi-tion performance have generally found a negative relationship(Chatterjee, Lubatkin, Schweiger, & Weber, 1992; Datta, 1991;Datta, Grant, & Rajagopalan, 1991; Datta & Puia, 1995). It is well

J. Li et al. / International Business Review 25 (2016) 471–483474

known that national culture strongly influences corporate culturein any environment (Langlois & Schlegelmilch, 1990; Schneider &Meyer, 1991). Hofstede and his colleagues have shown (Hofstedeet al., 2010) that national culture explains about 50% of thedifferences in managers’ attitudes, beliefs and values. Greaternational cultural distance should thus be associated with greatercorporate cultural distance and poorer acquisition performance ininternational M&As.

As we have discussed, firms from emerging economies are morelikely to go abroad to acquire strategic assets to build or enhancecompetitive advantage rather than to exploit their existingadvantages. Asset exploitation involves transfer of a firm’s existingknowledge, but strategic asset acquisition involves transfer of newknowledge, and much of it could be embedded in the society andpeople of the host country. The directions of knowledge flow whenexploiting existing resources and when seeking strategic assets aredifferent. When exploiting existing resources, acquirers areteachers; when seeking strategic assets they are students.Therefore, it is natural to expect that learning and absorbingembedded knowledge is more difficult than asset exploitation.Many strategic assets are intangible and embedded in the localenvironment (Hitt, Hoskisson, & Kim, 1997). Knowledge embedd-edness increases the difficulties in knowledge exchange (Coff,1999; Gupta & Govindarajan, 2000). Since cultural distance is amajor impediment affecting knowledge exchange, the negativeeffect of cultural distance is also likely to be more severe, especiallygiven that acquirers from emerging economies tend to beinexperienced in cross-border M&As.

Chinese multinational companies are interested in strategicassets such as innovation capacity, design know-how, brandnames, distribution channels, management skills, and naturalresources (Deng, 2009; Luo & Tung, 2007; Rui & Yip, 2008). Amongthese, innovation capacity and design know-how are usuallyembedded in a group of engineers and technicians; managementskills are embedded in executives; brand names and distributionchannel are embedded in the employees who are familiar with thelocal customers and local partners. It is very difficult to absorbthese intangible assets in a cross-border merger or acquisition. Thisis a major impediment to success (Hofstede et al., 2010). Inaddition, retaining key people from the acquired company is muchmore difficult than retaining the acquirer’s key people (Hofstedeet al., 2010; Krug & Hegarty, 2001). At the same time, acquiringnatural resources often involves complex political issues. Sincepeople from culturally distant countries are less likely to trust eachother (Doney et al., 1998) mistrust and poor communicationbetween the acquirers and the host country’s political system canlead to suspicion and hostility.

Overall, cultural distance increases the difficulty in commu-nications and establishing mutual trust. The most detrimentaleffect of cultural distance can be its effects on people, such as topmanagement team members and other employees involved in thedeals. Difficulty in communications can lead to informationproblems, and lack of mutual trust affects collaboration. Whensuspicion and hostility occur, target company employees may stopcooperating and begin to resist and even fight against the acquirercompany.

For many cross-border acquisitions of strategic assets, asignificant part of the value is embedded in the core employeesof the target company and relies critically on their willingness toparticipate and cooperate. Clearly, post-acquisition integration iscritical to the performance in cross-border M&As. Therefore, it isimportant to analyze whether and how cultural distance affectsfirms’ cross-border merger and acquisition performance.1

1 Similar problems have been analyzed by Cakici et al. (1996), Gubbi et al. (2010)

and others, but with different research questions and empirical contexts.

These discussions lead to our conceptual model for analyzinghow cultural distance affects Chinese firms’ cross-border M&Aperformance. Theories of dynamic capability and the organiza-tional learning (Cohen & Levinthal, 1990; Kogut & Zander, 1992;Lane et al., 2001) emphasize the heterogeneity in firms’ absorptivecapacity. Prior research has suggested that the greater theabsorptive capacity of an acquirer, the smoother the integrationprocess is likely to be (Bjorkman, Stahl, & Vaara, 2007), and thebetter the performance. This study therefore examined the mainfactors that affect Chinese firms’ absorptive capacity in cross-border M&As. In doing so it identified channels through whichChinese multinational companies can improve their cross-borderM&A performance. Specifically, the study focused on the acquirer’ssize and prior cross-border M&A experience, the industry-relatedness of the acquirer and the target, and the role of aprofessional financial advisor. While the first three factors areinternal to the firms, the last one is an external resource whichacquiring firms can also take advantage of Fig. 1 summarizes thetheoretical relationships tested in this study.

3. Hypothesis development

3.1. Cross-border M&As and shareholder value creation

Firms can enter an international merger or acquisition to betterexploit their existing resources and competitive advantages in newmarkets, to realize economies of scale or scope or for many otherreasons. In particular, many Chinese companies go abroad to seekstrategic assets (Luo & Tung, 2007). China, one of the largestemerging economies, differs from many other countries in itseconomic, institutional, and political structures. Difference can bea key driver for complementarity and synergy (Gubbi et al., 2010).As knowledge diversity increases from a low to a moderate level,new opportunities for knowledge creation will tend to emergefrom the diverse perspectives, mindsets, business models andknowledge bases newly available through a cross-border merger oracquisition. Knowledge creation occurs when the parties integrateeach other’s knowledge to create new knowledge, routines andcodes (Alavi & Tiwana, 2002; Fang, 2011; Phan & Peridis, 2000).Cohen and Levinthal (1990) have observed that, ‘‘In addition tostrengthening assimilative powers, knowledge diversity alsofacilitates the innovative process by enabling the individual tomake novel associations and linkages’’ (Cohen & Levinthal, 1990: p.131).

The Chinese government encourages firms to invest abroad.Luo, Xue, and Han (2010) have reviewed how the Chinesegovernment promotes outward investment. They found that itoffers incentives such as tax deductions and low-interest loans,and also investment treaties with other governments. The Chinesegovernment also helps Chinese multinationals to deal with hostcountry governments and various institutions. In general, this ‘‘goabroad’’ policy adopted by the Chinese government has alsorelaxed capital controls and overseas investment restrictions.Before the policy was adopted and implemented, such barriersconstrained the cross-border investment activities of Chinesefirms. The deregulation also lowered the costs for Chinese firmsentering foreign markets. Therefore, we expect that

H1. Cross-border M&As will have a positive effect on the value ofChinese acquiring firms.

3.2. Cultural distance and value creation

Cultural distance is known to be an important factor affectingthe success of cross-border M&As (Datta & Puia, 1995; Morosini

Fig. 1. Cultural distance and cross-border M&A performance.

J. Li et al. / International Business Review 25 (2016) 471–483 475

et al., 1998). Several special features of China can potentiallyexacerbate this situation. First, the Chinese culture is differentfrom Western culture (Hofstede et al., 2010). Due to its geographiclocation, China had relatively little interaction with the Westernworld before the industrial revolution. Its long and relativelyindependent development history endowed its people with a verydifferent collective programming system. Compared with multi-nationals from more developed economies, new multinationalsfrom emerging economies such as China lack internationalbusiness experience. In the long run the market may be able todevelop the necessary infrastructure (such as policies andintermediaries) to facilitate Chinese firms’ cross-border M&As,but with their short history of mergers and acquisitions today, theinfrastructure is still under-developed. And then, China is a largeeconomy and state-owned enterprises are important players in itscross-border M&As (Deng, 2009). This tends to stimulate suspicionabout the motivation of these firms, and in some cases concernabout national security in the host country. Given that culturaldistance is negatively associated with mutual trust and thesmoothness of communication (Doney et al., 1998), Chinese firmsmay suffer from cultural distance even in cases where businessoperations are more-or-less culture-free, for example, acquiringnatural resources.

If investors anticipate this effect, ceteris paribus, an acquirer’sstock price reaction to the announcement of an acquisition shouldbe negatively related to the cultural distance between China andthe host country/region. More specifically,

H2. The greater the cultural distance between China and a targetfirm’s country or region, the less the value created through a cross-border merger or acquisition.

3.3. Factors limiting the impact of cultural distance

How can acquirers manage the impact of cultural distance?Certain firm-level factors might mitigate to some extent theadverse effects of cultural distance on post-acquisition integrationand knowledge transfer. Prior research has suggested that theacquirer’s absorptive capacity affects the performance of M&As(Bjorkman et al., 2007).

Absorptive capability is a key factor affecting the outcome oflearning and knowledge exchange. Larger firms typically havemore resources (financial, marketing, and also personnel) and thusgreater absorptive capability. If such resources can be applied inthe international context, we should expect that the performanceof large firms in cross-border M&As be better. On the other hand,integration could be more costly and time-consuming for large

firms, and their acquisitions are more likely to be followed anddiscussed in the media and may induce political resistance. Largerfirms are also more prone to managerial hubris problems (Moeller,Schlingemann, & Stulz, 2004).

The resource-based view of the firm suggests that asset-richfirms may be better able to grasp an emerging opportunity, as theyare more likely to have the right set of resources, and this can insome situations confer first mover advantages. M&As, in turn, givefirms control over more diverse assets. Large firms would normallyhave more resources such as personnel and financial andmarketing capacity, and they also tend to have more internationalexperience (Bernard & Jensen, 2004; Calof, 1994). It is possible thatlarge firms may have more inertia and thus may be less flexible, butthis might be less critical in the M&As studied here, as the Chinesecompanies involved were actually pioneers, indicating theirwillingness to break from inertia.

In addition, large firms benefit from economies of scale inleveraging the newly acquired talents and knowledge from thetarget firm. Anticipating this potential benefit, the large acquirer willhave more incentives to ensure the success of an M&A integrationand work on any problems related to the cultural distance.

H3a. The negative relationship between cultural distance andvalue creation in a cross-border merger or acquisition will beweaker for larger acquirers.

The strategic assets such as superior technology, managementskills, distribution channels, reputable brands and natural resourceswhich Chinese firms seek to acquire are typically embedded in thesociety of the host country and the engineers, technicians andexecutives of the target firm. Even the acquisition of naturalresources, which may seem to be culture-free, often involvescomplex political issues. Cultural diffidence can inhibit mutual trust(Doney et al., 1998), and mistrust and poor communications can leadto suspicion and hostility in the host country. That can makeacquiring and integrating such assets particularly prone todifficulties caused by cultural barriers. Therefore, mechanisms thatcan improve communication should help mitigate the negativeeffects of cultural distance between the acquirer and the target firm.Of course learning, by definition, helps build a firm’s capabilities(Kale & Singh, 2007). In this study, previous experience in cross-border acquisitions, and whether the acquirer and the target are inthe same industry were taken as indicators of learning andknowledge overlap in the acquisition process.

Firms learn from their acquisition experiences, which can helpthe performance of subsequent acquisitions (Haleblian & Finkel-stein, 1999; Hayward, 2002). In a more fine-grained study, Zolloand Singh (2004) have further shown that previous acquisition

4 The stock returns based measure does need to assume that the market is semi-

strong efficient (Fama et al., 1969). For short-term windows as used in this study,

this assumption is usually believed to be true in the literature. It is also worth

pointing out that the market efficiency assumption may be challenged because we

are examining acquirer firms from an emerging market. Many people hold the view

that emerging financial markets are less efficiently. However, this may not be as

critical as long as short-run stock reactions are not affected by other issues

(Campbell et al., 1997). In addition, the popular view that financial markets of the

developed markets are more efficient than those of the emerging markets is not

supported by the recent empirical studies (Carpenter, Liu, & Whitelaw, 2014;

Griffin, Kelly, & Nardari, 2010). These studies find that on average, the stock markets

of the emerging economies are similarly efficient as the developed financial market

(Griffin et al., 2010), and that Chinese stocks are priced remarkably similar to the

U.S. stocks (Carpenter et al., 2014). There are also many existing studies applying

the event study method to emerging markets as measures of value creation, such as

Gubbi et al. (2010) for India, Chen and Young (2010) for China, and Bunkanwanicha,

Fan, and Wiwattanakantang (2013) for Thailand.

J. Li et al. / International Business Review 25 (2016) 471–483476

experience per se does not help, but it is codifying the experience inmanuals, systems, and other acquisition-specific tools whichcontributes to future M&A success.

Firms are naturally more familiar with their own industry.Firms from different industries may have very different requiredskill sets for managers and employees, as well as different sets ofroutines, customers and suppliers. In diversified acquisitions(when the acquirer and the target are not in the same industry),acquirer companies need to face a new industry environment. Forrelated acquisitions (when the acquirer and the target are in thesame industry), it is natural to expect that the acquirers can betterabsorb the assets (both tangible and intangible) of the targetcompanies. Thus, the negative effect of cultural distance may beweakened.

H3b. The negative effect of cultural distance on value creation in across-border merger or acquisition will be weaker for acquirerswith previous cross-border acquisition experience.

H3c. The negative effect of cultural distance on value creation in across-border merger or acquisition will be weaker for acquirersacquiring a firm in the same industry.

Acquirers need to evaluate a target firm’s assets, and doing thisproperly may require local knowledge and experience. Profession-al advisors can serve this purpose and help the acquiring firm(Angwin, 2001). In addition to the financial expertise, professionalfinancial advisors can also support cross-border M&As in severalother aspects. Many financial advisors, especially those involvingin cross-border M&As, have a global network of offices in manycountries, with people experienced in working across cultures.They can help mitigate the cross-cultural issues between theacquirer and target firms. Their global networks of offices allowthem to source talents and knowledge globally in dealing with anyemerging cross-cultural problems in M&As. Servaes and Zenner(1996) have shown that the more complex the deal, the more likelythat the acquirer will hire external financial advisors.

However, employing financial advisors is not free. Empiricalstudies provide mixed evidence as to whether, all things considered,hiring a financial advisor can help the acquiring firm (Rau, 2000;Servaes & Zenner, 1996). However, given that many Chineseacquirers are primarily acquiring strategic assets like superiortechnology which involve both economic and political risks,together with the fact that most Chinese acquirers have heretoforebeen inexperienced in the global market, the benefits of employing aprofessional advisor would be expected to outweigh the costs intheir case through limiting the impact of cultural distance.

H3d. The negative effect of cultural distance on value creation in across-border merger or acquisition will be weaker when a financialadvisor is involved.

4. Methods

4.1. Modeling

To assess the impact of cross-border M&As on shareholder value,we use the standard event study method originally proposed byFama’s group (Fama, Fisher, Jensen, & Roll, 1969).2 It is based on theassumption that stock markets can reflect any available informationinstantaneously.3 Event study uses a market model to calculate a

2 For detailed discussion, please refer to Chapter 4 of Campbell, Lo, and MacKinlay

(1997).3 Event study examines stock price reactions rather than value creation per se,

but stock price reaction can be regarded as a valid measure of firm performance.

Many studies have found that stock returns around important corporate events can

give a reliable measure of expected performance change (Fama et al., 1969).

firm’s expected return from the historical relationship between thatfirm’s stock return and the return of the market index. The differencebetween a firm’s realized return and its expected return is taken tobe an ‘‘abnormal return’’ induced by the event, in this case the firm’sannouncement of a merger or acquisition.

This method of measuring value creation of M&As based onstock price reactions has been widely adopted in the finance andaccounting literature (Campbell et al., 1997; Masulis, Wang, & Xie,2007; Moeller et al., 2004) and also in the management literature(Datta & Puia, 1995; Gubbi et al., 2010; McWilliams & Siegel, 1997).With this method, the abnormal return induced by an M&A eventcan be clearly measured and attributed to that particular event.Another way to measure value creation is to examine the change ofaccounting earnings. However, relative to the stock return method,accounting earnings do not react immediately to the event, and theresearchers will have to examine a longer time period, typically afew years into the future. However, this makes it difficult toattribute the accounting earnings change to the particular M&Adeal (since there are typically many other events happening duringsuch a long horizon). It is also hard to figure out how long in thefuture a researcher should analyze. Some benefits of an M&A dealmay be realized as earnings soon, but others will not be realizeduntil years later. For many deals, the initial accounting earningsmay also be negative (due to integration costs in the short run). Thestock returns based measure does not have these issues.4

There are three steps in conducting an event study.The first is to estimate the parameters of the firm’s market

model of the form Rit = ai + biRmt + eit, where Rit = return of stock i

on day t; Rmt = return on day t, of the market where stock i is listed;eit = the residual; ai and bi = the parameters. In this study, data overthe period from �252 to �23 trading days prior to the acquisitionannouncement day (denoted day 0) were used to estimate themodel parameters.5 The expected return for each day of the event

period was calculated as ERit ¼ ai þ biRmt . The abnormal return for

each day is ARit ¼ Rit � ðai þ biRmtÞ. The cumulative abnormal

return for each event was just the sum of the abnormal returns over

a specific period, which is CARið�m;nÞ ¼Pn

t¼�m ARit , where (� m, n)

delimit the event period from m days before the announcement ton days after. Various m and n could be used depending on thespecific situation.

The following equation was evaluated to test the determinants

of acquisition performance. CARi = a + bTXi + ji, where a and b are

the parameters, and Xi is a vector of variables which might beexpected to explain any abnormal returns.

5 Data from the pre-announcement period were used to estimate the model

parameters to avoid the choice of the event window influencing the parameter

estimates (Campbell et al., 1997). Day �252 is roughly 1 year before the

announcement and day �23 is roughly 1 month before. As Campbell has discussed

(Campbell et al., 1997), event study analysis is not very sensitive to the choice of the

estimation period. Our results are robust if we vary the estimation period to, for

example, the �250 to �50 Gubbi’s group used (Gubbi et al., 2010).

52

127

25

12

25

5156

5155

66

0

10

20

30

40

50

60

70

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Fig. 2. China’s cross-border M&As (by year).

J. Li et al. / International Business Review 25 (2016) 471–483 477

4.2. Sample and data

The data on cross-border M&As was collected from the SDCPlatinum Database of Thomson Financial (SDC thereafter). The SDCcollates data on M&As worldwide from many sources, includingEnglish and foreign news sources, exchange regulators worldwide,trade publications, and proprietary surveys of investment banks,law firms and other advisors. For each transaction the SDC collatesinformation about the acquirer and the target (including theirindustries, locations, listing exchanges and the nature of theirultimate owners) and also the characteristics of the deal (theannouncement date, the attitude of the target firm, and informa-tion on any financial advisors involved). Transactions betweenJanuary 2000 and December 2011 were studied. The stock prices,market values, returns and accounting data were collected fromDatastream/Worldscope.

There were 607 cases of cross-border M&As involving a Chineseacquirer listed on some stock exchange over the study period. Incases of multiple entries in the dataset for one pair of acquirer andtarget, only the first announcement was kept in the sample.Furthermore, in order to conduct the event study, the acquirer wasrequired to be a listed firm covered by Datastream/Worldscope.Deals which were never completed were deleted, as were thosewhere there was any other acquisition event in the event periodfrom 5 days before to 5 days after the focal deal. After the filteringand deleting the deals with missing variables, 367 deals remained.Fig. 2 shows the distribution of the deals by year. Before 2004 thenumber of cross-border M&As was quite low. The total number ofcross-border acquisitions doubled the average of the prior 3 yearsin 2007 and has remained relatively stable since.6

4.3. Independent and moderating variables

Two methods were used to measure the cultural differencesbetween a target firm’s home country and China. The first followedthe methods developed by Kogut and Singh (1988), using data fromHofstede (Hofstede et al., 2010) which is widely used by scholars

6 Several factors might explain the large increase in 2007 and maintained

afterwards. First, in 2007 the Chinese financial market was booming and asset

prices were high, in line with global financial markets at that time. Firms with high

stock prices are more likely to acquire (Shleifer and Vishny, 2003). After the global

financial crisis in 2008–2009, global asset prices decreased significantly, but

Chinese firms were much less affected. This provided an opportunity for them to

continue their acquisitions overseas. In order to control for macroeconomic

conditions, time fixed effects were included in the empirical models.

(Barkema, Shenkar, Vermuelen, & Bell, 1997; Drogendijk &Slangen, 2006; Lee et al., 2008; but also see Shenkar, 2012 forlimitations of this approach). Cultural distance (CD) was quantified

as CD j ¼P5

i¼1½ðIi j � Ii;ChinaÞ2=Vi�=5, where Iij = an index of the ith

cultural dimension and jth country/region; Vi = variance of theindex of the ith dimension; CDj = cultural distance of the jth targetfirm’s location from China (Kogut & Singh, 1988).7 CD constructedfrom Hofstede’s data (Hofstede et al., 2010) was the main measureof cultural distance.

Greater China plus Singapore Dummy (GCS). A dummy variablewas created to indicate transactions involving targets in HongKong, Macau, Taiwan or Singapore, as the majority of thepopulation in those areas is ethnically Chinese. That dummy(GCS) was used as a second cultural distance measure. In recentyears, scholars have become increasingly critical of Kogut andSingh (1988) CD index (Shenkar, 2001, 2012), thus analysing GCScan help us address some of the known problems. Durable socialconnections and networks (guanxi) are known to be important inChinese societies (Park & Luo, 2001; Xin & Pearce, 1996) includingSingapore (Bian & Ang, 1997) where the proportion of ethnicChinese in the population is not as high as in China. Guanxi is animportant cultural and social element (Park & Luo, 2001), but is notcaptured in the CD index. The GCS dummy was intended topartially capture the effect of guanxi, though it is not only aboutguanxi alone. In addition, analyses using CD and GCS shouldcorroborate each other and give more confidence in the results. Inthe robustness analysis, a CD measure based on the work ofHouse’s group (House et al., 2004) was also tested.

Acquirer size was measured by the natural logarithm of the totalassets of the acquiring firm, with data from Datastream/World-scope. An acquirer’s previous cross-border acquisition experience

was measured in terms of the number of its successful cross-border acquisitions in the previous 5 years. If they learn fromexperience, previous experience should help firms identify theright target, offer the right price and so on, and thus produce betteracquisition performance (Markides & Ittner, 1994).

A dummy variable was defined indicating whether the targetand acquirer were in the same industry. The industries were defined

7 Kogut and Singh (1988) used four dimensions in their national culture indexes:

power distance, individualism vs. collectivism, uncertainty avoidance, and

masculinity vs. femininity. Motivated by the fact that Chinese people hold strong

Confucian values and because this study focused on Chinese firms as acquirers, a

fifth dimension was included: long-term vs. short-term orientation. We thank one

anonymous referee for this suggestion.

J. Li et al. / International Business Review 25 (2016) 471–483478

by their 2-digit SIC (US) codes to measure the relatedness of theirbusinesses, as previous research (Markides & Ittner, 1994) hasshown that relatedness matters for an acquisition’s performance.

Another dummy variable indicated whether or not the acquireremployed any financial advisor in the transaction. If professionaladvisors help firms perform better due diligence, handle thefinancial and legal issues and lower the contracting costs (Angwin,2001; Boeh, 2011), and the cost of their services is less than thebenefits, advisor involvement should play a positive role.

4.4. Control variables

Besides cultural distance, other country level variables may alsoaffect value creation in cross-border acquisitions. Economic

distance, political stability and control of corruption were thevariables considered. They were used to indicate the quality of thecomplementary resources available and the stage of developmentof the institutional environment. Applying the methods of Tsangand Yip (2007), economic distance was operationalized as thenatural logarithm of the difference between China’s GDP per capitaand that of the target’s country/region in the year of theacquisition. The political stability index and control of corruption

index were from the World Governance Index of the World Bank. Asthe economic distance, the political stability index and the control of

corruption index were highly correlated, they were combinedinto an institutional index using principal component analysis. Thefirst principal component was �2.81 + 0.56*economic distance +0.70*control of corruption index + 0.94*political stability index. Itexplained 87.8% of the variance.

Previous studies have also shown that acquirer characteristics,target characteristics, and deal characteristics all affect the shareprice performance of the acquiring firm (e.g., Browne andRosengren, 1987; Capron & Shen, 2007; Datta et al., 1992; Officer,2007). In this study, the dummy variable acquirer SOE was definedto equal 1 when some level of the Chinese government was theultimate owner of the Chinese acquirer. That situation may havetended to induce political resistance from the target location’sgovernment and/or the general public who might view acquisi-tions by state-owned enterprises unfavorably. The Chinesegovernment may have motivations different from those of theminority shareholders of the acquiring company. It is possible thatthe government may push certain acquisitions through eventhough they may not be in the best interests of the acquiring firm’sshareholders (Chen & Young, 2010).

Because target attitude (Browne and Rosengren, 1987), listingstatus (Capron & Shen, 2007; Officer, 2007) and payment method(Datta et al., 1992) have been shown to matter for the acquirer’s

Table 1Descriptive statistics and correlations.

1 2 3 4 5

Mean 0.057 2.680 0.335 0 13.6

Std 0.275 1.956 0.473 1.623 2.83

1 CAR 1

2 CD �0.249 1

3 GCS 0.273 �0.826 1

4 Institution index 0.091 0.024 0.451 1

5 Acquirer size �0.134 0.026 �0.108 �0.181 1

6 Acquisition experience 0.112 �0.091 0.131 0.094 0.1

7 Acquirer SOE �0.054 �0.037 �0.047 �0.135 0.4

8 Same industry �0.071 �0.003 �0.058 �0.127 0.1

9 Financial advisor �0.037 �0.010 0.002 �0.019 0.2

10 Friendly target 0.079 0.111 �0.048 0.100 �0.0

11 Public target �0.056 0.139 �0.100 0.057 0.2

12 Cash deal �0.029 �0.099 0.074 �0.022 0.0

Number of deals is 367. Correlations >0.099 in magnitude are significant at the p � 0.0

returns, those were also controls in the models. Friendly target wascoded as 1 for friendly deals; public target was coded as 1 if thetarget was a listed firm; cash deal was coded as 1 for cashtransactions, and ‘‘0’’ for all the other deals including the dealspartially paid in cash. Industry and year dummies were alsoincluded in the models. The data used to evaluate the financialadvisor, acquisition experience, acquirer SOE, and industrydummies were all from the SDC.

5. Results

Table 1 shows summary statistics for the independent variablesand their correlation matrix. The data show that 33.5% of the targetfirms were in the areas indicated by the GCS dummy. As expected,GCS and CD were highly negatively correlated (�0.826). Theinstitutional index was positively correlated with GCS, suggestingthat the GCS area is relatively developed compared with othertarget areas. The correlations of the other variables with CD/GCS

were not very high, suggesting that multicollinearity should nothave been a major concern for this data.

Table 2 shows the statistical analysis. The results for differenttime windows are reported. Besides testing whether the meancumulative abnormal return was significantly larger than 0,Wilcoxon test results are also reported. For a 3-day window,CAR (�1, 1) was 2.7%, with a standard error of 0.006, which issignificant at the 1% level of confidence. The median CAR (�1, 1) is0.9%, which is also significantly positive, based on the Wilcoxontest. However, before firms announce an acquisition theirintentions may have already been detected by some outsideinvestors or leaked by insiders. In order to take this into account,two longer time windows were analyzed. The results show that thepositive stock market reaction was robust to the time windowchosen, and for longer windows the cumulative abnormal returnswere higher. All the results support the idea that on average,Chinese acquiring firms create value for their shareholders byundertaking cross-border M&As. Therefore, H1 was supported.

Since a longer time window can better capture the stock pricereaction well before a deal’s announcement, CAR (�5, 5) waschosen as the main dependent variable. The results are reported inTables 3 and 4. In Table 3, Model 1 included only the controlvariables. The results show that acquirer size was negativelyrelated to value creation, but acquisition experience and a friendlytarget were positively associated with value creation. Othercontrol variables did not show significant effects. In Model 2,cultural distance was added. The coefficient of CD was �0.038,significant at the 1% level. In the right half of Table 3, GCS (thegreater China plus Singapore dummy) was used to measure the

6 7 8 9 10 11 12

15 0.275 0.365 0.422 0.234 0.891 0.166 0.248

7 0.447 0.482 0.495 0.424 0.312 0.373 0.432

44 1

62 �0.011 1

95 0.029 0.073 1

86 0.091 0.142 0.113 1

48 �0.059 �0.025 �0.108 0.049 1

31 0.102 0.041 �0.026 0.081 �0.126 1

64 0.084 �0.042 0.071 0.114 0.019 0.167 1

5 level of confidence.

Table 2Cumulative abnormal return for different time windows.

Obs. Mean (%) S.E. Median Wilcoxon’s p

CAR (�1, 1) 367 0.027** 0.006 0.009** �0.0001

CAR (�2, 2) 367 0.037** 0.009 0.013** 0.004

CAR (�5, 5) 367 0.057** 0.014 0.026** 0.007

** Indicates significance at the 1% level of confidence.

J. Li et al. / International Business Review 25 (2016) 471–483 479

cultural difference between China and a target firm’s location. Theresults shown in Model 8 mirror those of Model 2. The coefficient ofthe GCS term was highly significant and positive. Furthermore,comparing with Model 1, the adjusted R2 of Model 2 increased from0.080 to 0.124, and the adjusted R2 for Model 8 increased to 0.123,both increases of more than 50%, suggesting that cultural distanceis an important factor explaining cross-border M&A announce-ment returns. Therefore H2 was supported.

Could firms mitigate the adverse effect of cultural differencewhen they engage in cross-border M&As? Will firm resourceshelp? Will previous acquisition experience help? Would firmssuffer less from cultural distance when they acquire targets in thesame industry? Could professional advisors help? The followingmodel formulations were evaluated to test the various parts ofhypothesis 3.

CARi ¼ a þ b1Culturei þ b2Culturei � Acquirer sizei þ b3Controls þ ji

CARi ¼ a þ b1Culturei þ b2Culturei � Acquisition experienceiþb3Controlsþji

CARi ¼ a þ b1Culturei þ b2Culturei � Same industryi þ b3Controls þ ji

CARi ¼ a þ b1Culturei þ b2Culturei � Financial advisori þ b3Controls þ ji

Table 3Cultural difference, acquisition performance and moderating effects: dependent variab

Baseline CD

Model (1) (2) (3) (4) (5) (6)

Cultural difference

(H2)

�0.038** �0.120** �0.046** �0.049** �0.042

(0.01) (0.04) (0.01) (0.01) (0.01)

CD * acquirer size

(H3a)

0.006*

(0.00)

CD * acquisition

experience (H3b)

0.032*

(0.02)

CD * same industry

(H3c)

0.027y

(0.01)

CD * financial

advisor (H3d)

0.016

(0.02)

Institution index 0.002 0.005 0.003 0.006 0.005 0.004

(0.01) (0.01) (0.01) (0.01) (0.01) (0.01)

Acquirer size �0.023** �0.020** �0.034** �0.019** �0.020** �0.020

(0.01) (0.01) (0.01) (0.01) (0.01) (0.01)

Acquisition

experience

0.075* 0.062y 0.073* �0.021 0.064* 0.068*

(0.03) (0.03) (0.03) (0.05) (0.03) (0.03)

Same industry �0.015 �0.013 �0.014 �0.014 �0.088y �0.012

(0.03) (0.03) (0.03) (0.03) (0.05) (0.03)

Financial advisor 0.013 0.011 0.009 0.021 0.012 �0.033

(0.04) (0.03) (0.03) (0.03) (0.03) (0.06)

Acquirer SOE 0.009 �0.003 �0.001 0.000 �0.002 �0.003

(0.04) (0.03) (0.03) (0.03) (0.03) (0.03)

Friendly target 0.092y 0.115* 0.113* 0.107* 0.106* 0.118*

(0.05) (0.05) (0.05) (0.05) (0.05) (0.05)

Public target 0.001 0.024 0.027 0.017 0.025 0.026

(0.04) (0.04) (0.04) (0.04) (0.04) (0.04)

Cash deal �0.018 �0.045 �0.043 �0.043 �0.040 �0.046

(0.03) (0.03) (0.03) (0.03) (0.03) (0.03)

Constant 0.118 0.203 0.418* 0.214 0.241 0.202

(0.19) (0.18) (0.20) (0.18) (0.18) (0.18)

Adjusted R2 0.080 0.124 0.135 0.132 0.130 0.124

Observations 367 367 367 367 367 367

y Significance at the 10% level of confidence.* Significance at the 5% level of confidence.** Significance at the 1% level of confidence.

where, Acquirer size proxies for the firm’s resources as previouslyexplained, Acquisition experience proxies for the acquiring firm’sforeign exposure, Same industry proxies for familiarity, andFinancial advisor indicates the involvement of external professionalhelp. The b2 coefficients in the five models measure how firm size,professional advisor involvement, foreign exposure and targetfamiliarity relate to the marginal predictive power of culturaldifference for an acquirer’s stock price performance.

Models 3–7 and Models 9–13 of Table 3 report the moderatingeffects. In Models 3 and 9, firm size was the moderating variable.The coefficient b2 was 0.006 and significant at the 5% level when CD

was used to measure cultural difference, and �0.033 andsignificant at the 1% level when the GCS dummy was used. Largefirms apparently suffered less from cultural problems, supportingH3a. As discussed in the hypothesis development section, on theone hand, large firms have more resources and potentially greaterabsorptive capacity; but on the other hand, they are less flexible.The models therefore were designed to reveal which effect isdominant. Given the possible negative effect of larger size (due tolower adaptability), using firm size as a measure of a firm’sabsorptive capability may even be a conservative test. In fact,though, the data show that larger firms can deal with the problemsassociated with cultural distance better than smaller ones.

Models 4, 5, 10 and 11 tested for any moderating effects ofacquisition experience and industry relatedness between theacquirer and the target. In Model 4 the coefficient of the termindicating an interaction between CD and acquisition experience

was positive and significant at the 5% level and in Model 10 thecoefficient of the term indicating an interaction between GCS and

le is CAR (�5, 5).

GCS

(7) (8) (9) (10) (11) (12) (13)

** �0.139** 0.165** 0.598** 0.209** 0.210** 0.192** 0.662**

(0.03) (0.04) (0.14) (0.04) (0.05) (0.04) (0.14)

0.006* �0.033** �0.030**

(0.00) (0.01) (0.01)

0.022y �0.159* �0.091y

(0.01) (0.07) (0.04)

0.025y �0.112y �0.106y

(0.01) (0.06) (0.06)

�0.002 �0.110 �0.033

(0.02) (0.07) (0.07)

0.008 �0.015 �0.011 �0.015 �0.014 �0.015 �0.007

(0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01)** �0.027** �0.021** �0.006 �0.020** �0.021** �0.021** �0.000

(0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01)

0.030 0.058y 0.074* 0.121** 0.061y 0.064* 0.119**

(0.05) (0.03) (0.03) (0.04) (0.03) (0.03) (0.04)

�0.091y �0.017 �0.020 �0.019 0.017 �0.015 0.007

(0.05) (0.03) (0.03) (0.03) (0.04) (0.03) (0.03)

0.018 0.010 0.003 0.016 0.014 0.047 0.014

(0.06) (0.04) (0.03) (0.04) (0.04) (0.04) (0.04)

0.014 �0.001 0.005 0.004 0.000 0.001 0.015

(0.03) (0.04) (0.03) (0.04) (0.04) (0.04) (0.03)

0.080y 0.112* 0.107* 0.105* 0.100* 0.112* 0.074

(0.05) (0.05) (0.05) (0.05) (0.05) (0.05) (0.05)

0.026 0.023 0.025 0.017 0.023 0.022 0.021

(0.04) (0.04) (0.04) (0.04) (0.04) (0.04) (0.04)

�0.039 �0.035 �0.028 �0.032 �0.034 �0.035 �0.028

(0.03) (0.03) (0.03) (0.03) (0.03) (0.03) (0.03)

0.614** 0.048 �0.118 0.021 0.036 0.035 0.008

(0.17) (0.18) (0.19) (0.18) (0.18) (0.18) (0.15)

0.123 0.123 0.145 0.135 0.129 0.126 0.138

367 367 367 367 367 367 367

Table 4Cultural difference, acquisition performance and moderating effects: dependent variable is CAR (�5, 5).

Sub-period By geography CD (GLOBE)

(1) (2) (3) (4) (5)

�2008 >2008 Poorer Richer GLOBE

Cultural difference (H2) �0.126* �0.187** �0.126+ �0.127* �0.187**

(0.05) (0.06) (0.07) (0.05) (0.06)

CD * acquirer size (H3a) 0.004* 0.012** 0.007* 0.005* 0.008*

(0.00) (0.00) (0.00) (0.00) (0.00)

CD * acquisition experience (H3b) 0.033y 0.032* 0.027y 0.027 0.063y

(0.01) (0.01) (0.01) (0.02) (0.03)

CD * same industry (H3c) 0.019 0.035y 0.007 0.009y 0.024*

(0.02) (0.02) (0.03) (0.02) (0.01)

CD * financial advisor (H3d) 0.042y �0.066* �0.058y 0.033 0.037

(0.02) (0.03) (0.03) (0.03) (0.03)

Institution index 0.003 0.007 0.017 �0.056 �0.005

(0.01) (0.01) (0.01) (0.08) (0.01)

Acquirer size �0.016 �0.078** �0.033y �0.035** �0.040**

(0.01) (0.02) (0.02) (0.01) (0.01)

Acquisition experience 0.019 �0.043 �0.036 0.044 �0.025

(0.07) (0.11) (0.11) (0.07) (0.08)

Same industry �0.036 �0.180* 0.008 �0.051 �0.064

(0.07) (0.09) (0.09) (0.07) (0.08)

Financial advisor �0.100 0.277** 0.285* �0.129y �0.058

(0.07) (0.11) (0.11) (0.08) (0.09)

Acquirer SOE �0.044 0.052 0.083y �0.049 0.001

(0.05) (0.04) (0.04) (0.05) (0.04)

Friendly target 0.136* �0.032 0.003 0.154y 0.077

(0.06) (0.08) (0.05) (0.08) (0.05)

Public target 0.052 0.080 0.039 0.073 0.038

(0.06) (0.06) (0.05) (0.07) (0.04)

Cash deal �0.061 �0.045 �0.079y �0.013 �0.041

(0.05) (0.04) (0.04) (0.05) (0.03)

Constant 0.433y 1.049** 0.892* 0.410 0.704**

(0.26) (0.29) (0.35) (0.37) (0.25)

Adjusted R2 0.147 0.206 0.055 0.187 0.118

Observations 195 172 168 199 345

y Significance at the 10% level of confidence.* Significance at the 5% level of confidence.** Significance at the 1% level of confidence.

J. Li et al. / International Business Review 25 (2016) 471–483480

acquisition experience was negative. Both are consistent with theH3b argument that cultural difference has less effect on experi-enced acquirers. Model 5 shows that the coefficient of the termindicating an interaction between CD and same industry waspositive and Model 11 has a negative sign on the coefficient ofthe term indicating an interaction between GCS and same

industry. Both were significant at the 10% level, confirming apossible positive role of industry relatedness in mitigating thenegative effect of cultural difference. H3c was thus marginallysupported. Models 6 and 12 tested the role of a financial advisor inmitigating the negative effect of cultural distance. The coefficientsof the interaction terms in Models 6 and 12 were not significant,thus there was no support for the argument that a financial advisorcan help. H3d was not supported.

Table 4 shows the robustness analyses. We first dealt with theissues that China’s business policies and the business environmentregarding outward foreign direct investment changed during thesample period. The data were separated into two subperiods basedon the year of deal announcement. Model 1 treats the period from2000 to 2008 and Model 2 the second subperiod from 2008 to2010. That separation roughly divides the sample equally into thetwo subperiods. The results show that the coefficient of theinteraction term relating cultural distance and acquirer size andthe coefficient of the interaction term relating cultural distanceand acquisition experience are both positive and significant in bothsubperiods. The coefficient of the interaction term relating culturaldistance and participation in the same industry is only significantin the second subperiod, but it too is positive. These results are

consistent with the whole sample analysis and give further supportto H3a, H3b and H3c. The coefficients of the interction terms relatingcultural distance and the use of a financial advisor are all significantbut with different signs in the two subperiods. In unreported results,the interaction term relating cultural distance and financial advisorproved to be not significnt in either subperiod when it was usedalone without other interaction terms. There was, therefore, noconsistent support for H3d. Overall, the subperiod analysis showedresults similar to those with the whole sample. This suggests thatbusiness environment changes may not have had any significantimpact on the effect of cultural distance.

In Models 3 and 4 the sample was divided into two subsamplesbased on the GDP per capita of the target company’s country. Thiswas to deal with the suggestion partners from different jurisdic-tions may bring very different value creation implications. Thedeals were sorted into the two subsamples year by year. In case of atie, a deal was put into the richer group. When these subsampleswere used in the analysis, the coefficient of the term representingthe interaction between cultural distance and acquirer size waspositive and significant with both subsamples. The coefficients ofthe terms representing the interactions between cultural distanceand acquisition experience and between cultural distance andoperating in the same industry were all positive in thoseregressions where they were significant. Again, the analysis ofthe moderating effect of employing a financial advisor did notshow consistent results. Therefore, the subsample analysis showedresults similar to those with the whole sample. This suggests thatthe level of economic development of the target company’s

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country may not have had a significant impact on the effect ofcultural distance.

A different way of representing cultural distance was tested inModel 5. Specifically, we used the nine cultural dimensionsdeveloped by House (House et al., 2004). This has been shown tocorrelate well (correlation coefficient of 0.78) with Hofstede’scultural distance variable (Hofstede et al., 2010). Not surprisingly,the results were also similar to the results presented inTable 3. This suggests that our results are not sensitive to theoperationlization of cultural distance chosen.

Overall, the results in Tables 3 and 4 support H3a, H3b, H3c, butnot H3d. The negative relationship between cultural distance andvalue creation in cross-border M&A deals can be mitigated byacquier size, acquisition experience, and whether the acquier andthe target are in the same industry. We did not find a significantmoderating effect of employing a financial advisor.

6. Discussion and conclusions

Cross-border acquisitions by acquirers from emerging econo-mies are more likely to be driven by a motivation to acquire strategicassets that can help build or enhance competitive advantage. Mostsuch assets are intangible in nature—technology, managementskills, human capital, and so on. Communicating intangibleinformation is exposed to cultural conflicts. This study investigatedhow cultural distance affects the performance of Chinese acquiringfirms and how they can mitigate any negative effect.

This analysis of stock price performance surrounding cross-border M&As involving listed Chinese firms as acquirers suggeststhat, on average, the acquirer’s stock price rises 2–4%. Thisindicates that many acquiring firms were prudent in makingacquisition decisions. However, this does not mean that cross-border M&As are not risky. Cultural differences between China andthe target firms’ locations strongly predict the acquiring firms’share price performance. Specifically, the greater the culturaldifference, the smaller the concomitant price change. Thesefindings are consistent with the theory that cultural differencescan impede knowledge transfer, communication and so on, andthus increase the difficulty of integrating an acquisition. This alsoindirectly suggests that the internationalization of Chinese firmswas indeed at a very early stage during the study period. Theirbusiness success, at least in cross-border M&As, was stillconstrained in regions culturally dissimilar to China.

Firm size, our proxy for more resources and greater absorptivecapability, was correlated with less adverse effect of culturaldifference. We also found that experienced acquirers andacquisitions involving an acquirer and target in the same industry(industry relatedness was used as a familiarity measure betweenthe acquirer and the target) were less affected by cultural distance,suggesting experience and familiarity between the target and theacquirer can help. However, involvement of a professional financialadvisor did not seem to be helpful. While a professional advisor issupposed to add value in cross-border M&As, no significantmitigation of the negative relationship between cultural distanceand value creation was evident in the data. Either the advisors’ability was limited, or the Chinese acquirers were not yet able touse their advisors effectively.

Cross-border M&As initiated by Chinese companies are arelatively new phenomenon and are also relatively under-studied.New multinationals from emerging economies tend to seek strategicassets abroad to enhance their competitive advantages. However,many such strategic assets are embedded in the environment andpeople of the host country. Cultural distance makes it difficult toacquire and transfer that embedded knowledge. In any case, a firm’sabsorptive capability is critical in helping mitigate the negativeeffects of cultural distance. With increasing foreign acquisitions by

Chinese firms, it is important to know whether they are benefittingtheir shareholders in their cross-border M&As and how they can bestmanage cultural distance. These results show that cultural distanceis certainly an important obstacle for Chinese cross-borderacquirers, and that they need to carefully design a procedure todeal with it.

This study has identified several factors that could possiblymitigate the negative effects of cultural distance, and the resultssuggest that large firms, and those with cross-border acquisitionexperience are perceived by the market as being able to managecultural problems better. When the acquiring and target firmsare from the same industry, the market also tends to expect thatthe acquirer will suffer fewer problems dealing with culturaldifferences.

Mergers and acquisitions are a very important process thatneeds a lot of knowledge about the local culture and environment.It would be interesting to see how Chinese firms approach marketaccess via the use of relationships (guanxi). For example, someforeign cultures might resemble China in placing strong emphasison relationships. Future research should explore further how thisand other factors can help firms from emerging economies dealwith inter-cultural differences in cross-border M&As.

Acknowledgements

We are grateful to Editor Pervez Ghauri and anonymousreviewers for their insightful feedback during the review process.The research is supported in part by the Research Grants Council ofHong Kong (HKUST #16501814), Natural Science Foundationof China (Project Number: 71302127), and The Special ResearchFund for the Doctoral Program of Ministry of Education (ProjectNumber: 20130016120001).

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