FOREIGN OWNERSHIP AND FIRM PERFORMANCE
June 8, 2009
Researchers at the National Bureau of Economic Research (NBER) conducted the first systematic examination of the recent phenomenon of American firms being acquired by companies in emerging economies, particularly China and India. Specifically, they ask: What happens to an American firm's performance after it is taken over by a corporation in an emerging economy?
The first question researchers faced in estimating post-acquisition performance was: causality versus selection? Are emerging-market firms simply picking certain types of acquisition targets, or do foreign acquisitions change target-firm performance? The data strongly support the proposition that the selection of U.S. firms for acquisition is not random, but favors U.S. targets with high levels of sales, employment and assets:
- Researchers found that the stock market response of the acquired firms is positive and significant around the time of the acquisition announcement.
- Following the acquisition, the performance of target firms also improves; in particular, the return on assets in target firms grows by an average of 16 percent in the five years following the takeover.
- The evidence also suggests that U.S. target firms undergo significant restructuring after acquisition by emerging-market firms; employment and the capital stock decrease, suggesting that unprofitable divisions may be sold off or closed.
Moreover, the pattern of increasing profitability as seen by an increase in the return on assets coupled with declining sales is consistent with improvements in firm efficiency following acquisition. In addition, declining employment and net property, plant and equipment suggest downsizing of divisions to improve overall profitability as a percent of assets.
Furthermore, the results suggest that emerging country acquirers tend to choose U.S. targets that are larger in size. In the years following the acquisition, sales and employment decline while profitability rises, suggesting significant restructuring of the target firms, say the researchers.
Source: NBER Digest, June 2009 and Aunusha Chari, Wenjie Chen, and Kathryn M.E. Dominquez, "Foreign Ownership and Firm Performance: Emerging Market Acquisitions in the United States," National Bureau of Economic Research, Working Paper, No. 14786, March 2009.
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