Target shareholders' wealth creation in domestic and cross‐border acquisitions in India

Abstract

Purpose This paper seeks to compare target shareholders' wealth gains in domestic and cross‐border acquisitions in India. Two existing schools of thought namely, the industrial organizational theory and bid‐specific factors theory have been compared to identify which of these two theories affect the target shareholders' announcement wealth gains in India. Design/methodology/approach Standard event study methodology has been applied to compute the announcement returns for domestic and cross‐border acquisitions. Cross‐border effect is calculated to compare the value creation in the two sets of acquisitions. Furthermore, cross‐sectional regression analysis is conducted to capture the impact of bid‐related features on target shareholder's value creation. Findings The results indicate that both domestic and cross‐border acquisitions have created value for the target company shareholders on the announcement. Nonetheless, the analysis of cross‐border effect as well as regression analysis makes it evident that value creation is higher for domestic acquisitions as compared to cross‐border acquisitions due to the influence of various bid‐specific factors. Thus, in India, bid‐related variables are the fundamental drivers of the target's announcement wealth gains irrespective of the nationality of the acquirer. Originality/value The paper extends the discussion on the target's wealth creation in domestic and cross‐border acquisitions by segregating the existing literature into two schools of thoughts namely, the industrial organizational school and bid‐specific factors school in an emerging economy like India. Moreover, various reasons specific to Indian mergers and acquisitions have been forwarded to explain the subdued market reaction to cross‐border acquisitions.

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