This paper investigates the short-term wealth effects on foreign acquirers and Chinese targets involved in 37 cross-border mergers and acquisitions (M&As) in Chinese financial sector during the period 1990-2005. The intra-industry effects of significant cross-border M&As are then analyzed by examining the wealth effects on the rivals of Chinese target firms. The empirical results show that both experienced foreign bidders and Chinese targets obtain significant positive wealth gains during the event, while inexperienced foreign bidders suffer losses. This paper also demonstrates that foreign bidders with Chinese banking targets experience positive wealth gains, while they suffer losses with Chinese non-banking targets. Moreover, this paper shows that the wealth gains to foreign bidders are positively related to exchange rate volatility and to the size, business scope and geographic location of the foreign bidders. In addition, this paper documents the fact that intra-industry effects vary across events and rivals for significant cross-border M&As. More specifically, the event-specific effect is time-variable along with change in the Chinese legal system. Rivals of larger size, higher prior stock returns and lower book to market ratio, experience more favorable wealth effects. In addition, the rivals listed in Hong Kong experience better wealth gains than those listed in mainland China.
Key words: cross-border M&As, Chinese financial institutions, wealth effect, intra-industry effect JEL Classification: G31; G34
During the past decades an unprecedented wave of cross-border mergers and acquisitions (M&As) has been witnessed worldwide, possibly due to regulation and policy changes, firm restructuring, increased economic integration and international trade, target firm undervaluation, and the strong global financial market to finance M&As (Kiymaz, 2004). An international firm can also compensate for lost profit margins in its domestic market through cross-border M&As. The shareholder wealth of bidders can be increased if the cross-border M&As can increase the bidders' market share and economies of scale or scope, and/or can reduce their operating risk and expense. So a country with strong economic development potential, favorable regulations, and an active role in international trade, is more likely to be a focus of expansion (Vennet, 1996; and Diaz et al., 2002). As the largest and one of the fastest growing emerging economies in the world, China has been attracting international investors' attention for its enormous market size, extensive international trade, and sustainable economic development with high potential for further expansion. Recent changes in the Chinese legal system also facilitate the entry of foreign investors to into the Chinese market.
In this wave, the financial service industry plays an increasingly important role, as it not only provides financial supports for M&A activities, but itself also experiences a period of reconstruction and consolidation. Many foreign financial institutions have focused on M&As in the Chinese financial market, especially after China entered WTO. Until the end of 2005, foreign financial institutions had direct investments in the Chinese insurance, banking, securities and trust industries through cross-border M&As. The financial service sector is the field in which M&A activities have taken place most frequently in China, and this trend will continue (PriceWaterhouseCoopers, 2006). It is thus important for China to improve her domestic financial institutions' comprehensive competence to meet the challenges from foreign competitors. Allowing foreign financial institutions to merge and acquire Chinese domestic financial institutions is to serve this purpose. First, foreign investments can help domestic financial institutions...