Essay on The Wealth Effect of Cross-Border Mergers and Acquisitions in the Chinese Financial Sector

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Pages: 77

The Wealth Effect of Cross-Border Mergers and Acquisitions in the Chinese Financial Sector

Abstract

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
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This study makes three contributions to current literature.
• First, the evidence from the perspective of international acquirers in developed countries and targets in one single emerging market in the financial industry, is unique. This helps explain why China could be one of the engines to stimulate world economic development.
• Second, the evidence from Chinese targets can complement and be compared with that from developed countries. China's relatively weak legal system, with low information transparency and low quality of activity reports, may make information disclosure of Chinese firms involved in cross-border M&A activities different from that of the developed markets. In addition, the Chinese government has a more influential political and economic role in firms' operations than governments in developed countries. So any governmental actions/intentions may disclose information to the market participants and thus influence market expectations.
• Final, China has recently changed regulations to become more favourable to M&As involving foreign financial institutions. This provides a unique opportunity to test the impact of regulation changes on foreign firm decisions to expand overseas.
It can be seen from the above analysis that this study is of great significance for China's long term economic prosperity and for evaluating foreign financial institutions' investment performance in such a large emerging market.

The empirical results of this