The wealth effects of foreign acquisitions in the U.S

Abstract

The theory of foreign direct investment posits that multinational investments are valuable to a firm because of capital, product and labor market imperfections. A consequence of this theory is that total wealth gains of foreign acquisitions, representing a substantial part of foreign direct investment, will be larger than the wealth gains of domestic acquisitions. In line with the findings of existing research on domestic acquisitions, we expect the target shareholders to reap all the wealth gains associated with these acquisitions. We therefore hypothesize that the returns to targets of foreign acquisitions will be higher than the returns to targets of domestic acquisitions, while the returns to acquirers in foreign acquisitions will not be different from the returns to domestic acquirers. To test this hypothesis we examine the wealth effects on target firms of 929 foreign acquisitions in the United States over the period 1979-1988. We find that domestic targets do not gain more from foreign acquisitions acquirers gain (more) from acquisitions in the U.S.