Cultural characteristics of host countries and risk of failure in cross-border M&A: an empirical study based on the overseas M&A of Chinese enterprises

ZUO Zhigang1 YANG Fan2

(1.School of Accounting, Guangdong University of Foreign Studies, Guangzhou, China 510006)
(2.RSM Shenzhen Branch, Shenzhen, China 518000)

【Abstract】This paper is to identify the role and mechanism of host-countries’ culture in determining the risk of cross-border merge and acquisition (M&A). With the increasingly complex international environment, cross-border M&A is not only affected by economic risks, but also facing non-economic challenges. Thus, the insight into the cultural characteristics of host-countries and their economic impacts is of great significance for improving the decision-making of cross-border investment. The questions discussed in this paper are what cultural characteristics affect the completion of cross-border M&A deals and what the underpinning mechanism is. These questions are hot issues in the field of cross-cultural finance research. From the angle of the origin of liability of foreignness (LOF) to cross-border acquirers, and based on the institutional theory and the social capital theory, this paper analyzed how the cultural characteristics of host-countries influence acquirers’ legitimacy disadvantage and information disadvantage. Empirically, this paper used a dataset of 2722 Chinese cross-border M&A samples from 1997 to 2017 and a logistic regression model to test the hypothesis. The results show that the level of cultural tolerance and trust in host-countries are negatively correlated with the risk of cross-border M&A failure. In addition, a test with the rule of law in host-countries as moderator variable finds that when the rule of law in host-countries is at a high level, the tolerance and trust have less impact on cross-border M&A risk, suggesting a substitute relation between formal and informal institutions. Further testing also finds that the cultural characteristics of host-countries have a similar impact on the post-performance of cross-border M&A. We conclude that tolerance and trust are two cultural vectors directly related to cross-border M&A risk. Tolerance culture has an impact on the legitimacy disadvantage of acquirers, and then forms the risk of whether M&A activities can be recognized locally; trust culture has an impact on the information disadvantage of acquirers, thus forming the risk in decision-making and contract execution. In the environment of a high level of the rule of law, the influence of culture as an informal system on cross-border M&A risk decreases. This paper contributes to the literature by overcoming the limitation of the popular cultural distance paradigm in international business studies, shedding light on the impact of cultural characteristics, and revealing that the two cultural vectors are significantly related to cross-border M&A risk. These findings deepen our understanding about the mechanism of LOF on cross-border M&A risk, and also provide practical implications to better cross-border M&A decision.

【Keywords】 cross-border M&A; risk of failure; tolerance culture; trust culture;

【DOI】

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ISSN:1001-4950

CN: 31-1063/F

Vol 43, No. 01, Pages 58-72

January 2021

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