Differences in institution quality and the impact of international M&As on rivals’ expected performance

The literature on international M&As suggests that institutions have direct implications on the performance of partners announcing M&As. Interestingly enough studies have shown that international M&As also directly impact the performance of partners’ rivals. In this study, we propose that the positive or negative performance effects on rivals upon international M&A announcements are likely to be dependent on rivals’ and partners’ differences in the quality of their institutions. The intuition here is that large institutional difference can make international M&As more complex and less likely to have a competitive impact, but also that the home institutions of their direct rivals can constrain rivals’ ability to react. We assess the impact of international M&A announcements on the expected performance of rivals through an event study, and focus on the difference in bidder and target countries’ institutional quality, as well as on the quality of institutions in the rival’s country. Our empirical results confirm the importance of these factors, and suggest that institutional factors between and within countries in cross-border M&As have a significant impact on the competitiveness of the merging partners’ and on the expected performance of their rivals.