Foreign institutional investors and equity share decisions in cross‐border mergers and acquisitions

Abstract

This study examines the role of foreign institutional investors in shaping acquiring firms' equity share decisions in cross‐border mergers and acquisitions (M&As). We argue that foreign institutional ownership (FIO) from a given country is positively associated with the share of equity sought in the target firm in this country because foreign institutional investors can help reduce information asymmetry between the acquiring and target firms. Moreover, this positive relationship is stronger if target firms are in countries with weaker institutional development because acquiring firms suffer from higher information asymmetry and thus are more inclined to rely on foreign institutional investors for information. Findings from a sample of 4166 cross‐border M&As by US firms lend support to our arguments.Can foreign institutional investors influence acquiring firms' equity share decisions in cross‐border M&As? We posit that local knowledge and information foreign institutional investors provide to acquiring firms can reduce uncertainty in the M&A process. Using data on cross‐border M&As by US firms, we find that high levels of FIO are positively associated with the equity sought in target firms by acquirers. This effect is stronger when target firms are located in countries with weak institutions. Our study highlights the beneficial role of FIO that firm executives should be aware of and has practical implications for how firms manage the M&A process.