This paper is to identify the role and mechanism of host-countries’ culture in determining the risk of cross-border merge and acquisition（CM&A）. With the increasingly complex international environment, CM&A is not only affected by economic risks, but also facing non-economic challenges. Thus, insight into the cultural characteristics of host-countries and their economic impacts is of great significance for improving the decision-making of cross-border investment.
The questions discussed in this paper are what cultural characteristics affect the completion of CM&A deals and what is the underpinning mechanism. These questions are hot issues in the field of cross-cultural finance research. From the angle of the origin of Liability of Foreignness（LOF）to cross-border acquirers, and based on the institutional theory and the social capital theory, this paper analyzes how the cultural characteristics of host-countries influence acquirers’ “legitimacy” disadvantage and information disadvantage. Empirically, this paper uses a dataset of 2722 Chinese CM&A samples from 1997 to 2017 and a logistic regression model to test the hypothesis.
The results show that the level of cultural tolerance and trust in host-countries are negatively correlated with the risk of CM&A failure. In addition, a moderating test of the rule of law in host-countries finds that when the rule of law in host-countries is at a higher level, the tolerance and trust have less impact on CM&A risk, suggesting a substitute relation between formal and informal institutions. Further testing also finds that the cultural characteristics of host-countries have a similar impact on the post-performance of CM&A.
We conclude that tolerance and trust are two cultural vectors directly related to CM&A risk. Tolerance culture impacts on the “legitimacy” disadvantage of acquirers, and then forms the risk of whether the M&A activity can be recognized locally; trust culture impacts on the information disadvantage of acquirers, thus forming the risk in decision-making and contract execution. In the environment of a higher level of the rule of law, the influence of culture as an informal system on CM&A risk decreases.
This paper contributes to the literature by overcoming the limitation of the popular “cultural distance” paradigm in IB studies, shedding light on the impact of cultural characteristics, and revealing that the two cultural vectors are significantly related to CM&A risk. These findings deepen our understanding about the mechanism of LOF on CM&A risk, and also provide practical implication for better CM&A decision.