A Principals-Principals Perspective of Hybrid PDF

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JOMXXX10.1177/0149206318764293Journal of ManagementChen et al. / Principals-Principals Perspective
Journal of Management
Vol. XX No. X, Month XXXX 1–28
DOI: https://doi.org/10.1177/0149206318764293
10.1177/0149206318764293
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A Principals-Principals Perspective of Hybrid

Leviathans: Cross-Border Acquisitions by State-
Owned MNEs
Victor Zitian Chen
University of North Carolina at Charlotte
Aldo Musacchio
Brandeis University and NBER
Sali Li
University of South Carolina
We propose a private-government principals-principals approach to understand corporate gov-

ernance of state-owned multinationals. We explain how the conflicts between large government
and private blockholders may affect managerial decisions in the propensity of completing a
cross-border acquisition and its dollar value. We argue that conflicts among different blockhold-
ers make it difficult to pursue large-scale, cross-border deals because such conflicts may lead
to a less coherent objective function and to a rejection of deals that do not satisfy these groups’
conflicting objectives. Finally, we show that such blockholder conflicts are moderated by the
salience of the government’s “dual influence” on the firm in question, related to a state’s soft
budget constraint and/or diplomatic advantages in countries where the host and the home mar-
kets do not enjoy a bilateral investment treaty. Empirically, we found highly supportive evidence
based on a global sample of 7,564 cross-border acquisitions between 2004 and 2013.
Keywords: agency theory; state-owned enterprise; multinational enterprise; cross-border

acquisitions
Acknowledgments: We owe thanks to Alvaro Cuervo-Cazurra, Klaus Meyer, Sun Pei, Daniel Shapiro, the editor
William Wan, and two anonymous reviewers for their help comments. We also benefited from comments to our
presentations at the 2016 Academy of International Business Meeting and 2016 Academy of Management Meeting.
This project was funded by research grants from Belk College of Business, University of North Carolina at Char-
lotte, and CIBER University of South Carolina.
Supplemental material for this article is available with the manuscript on the JOM website.
Corresponding author: Victor Zitian Chen, University of North Carolina at Charlotte, 9201 University City Blvd,
Charlotte, NC 28277, USA.
E-mail: zchen23@uncc.edu
1
2 Journal of Management / Month XXXX
Recent work on corporate governance highlights new avenues of research, expanding

modern agency theory by examining the differing and often conflicting goals of powerful
blockholders in corporations (e.g., Attig, El Ghoul, Guedhami, & Rizeanu, 2013; Edmans &
Manso, 2011; Seth, Song, & Pettit, 2000, 2002). This is a special type of agency conflict in
which powerful blockholders compete to be the controlling shareholder, having more say in
managerial decisions. Yet, there is still scarce theoretical and empirical work to understand
the consequences of those conflicts when it comes to major strategic decisions, such as cross-
border mergers and acquisitions (M&As), and even less work understanding what happens
when one of those blockholders is the government. Therefore, in this article, we propose a
unique private-government principals-principals (PP; plural) conflict perspective.
Let us use an example to illustrate how private-government PP conflict differs from the
traditional principal-agent (PA) and PP conflict. Consider two U.S. firms (both from our
database): Quicklogic Corporation and 4Licensing Corp. In 2007, Dimensional Fund
Advisors LP, a private mutual fund, owned 48% of Quicklogic’s voting rights, whereas the
state of Wisconsin owned 52%. In 2016, 4Licensing Corp was 50% owned by two private
mutual funds: Prescott Group Aggressive Small Cap Master Fund and Prescott Group Capital
Management—both of which belonged to the same business group. The two firms had a
similar ownership concentration ratio: a proxy for traditional PA and PP conflicts but very
different private-government PP conflicts. Consequently, Quicklogic may have encountered
more severe conflicts due to the economic-versus-political objectives of its rival blockhold-
ers than what we would observe in 4Licensing. In that context, these two groups of block-
holders could fight each other for control and would end up monitoring management more
closely to make sure that they were not yielding to the opposing group. Private-government
PP conflicts are therefore based on multiple blockholder groups, and their implications in
terms of agency costs are different from, and not necessarily correlated with, the traditional
PA or PP conflicts as measured by ownership concentration (Chen & Young, 2010; J. Li &
Qian, 2013; Renders & Gaeremynck, 2012; Su, Xu, & Phan, 2008; Young, Peng, Ahlstrom,
Bruton, & Jiang, 2008).
We study the government-private blockholder conflicts in the context of modern state-
owned enterprises (SOEs). While private shareholders care primarily about financial returns
(albeit with different time horizons), government blockholders have a variety of political and
diplomatic objectives in mind that may be orthogonal to financial returns (Bruton, Peng,
Ahlstrom, Stan, & Xu, 2015). In light of their remaining strong influence in the global econ-
omy (Sauvant, Sachs, & Jongbloed, 2012), recent years have seen a renaissance in the study
of SOEs, especially state-owned multinational enterprises (SOMNEs; Bruton et al., 2015;
Inoue, Lazzarini, & Musacchio, 2013; Jeong & Weiner, 2012; Lazzarini, 2015; J. Li & Qian,
2013; Musacchio & Lazzarini, 2014; Ramaswamy, Li, & Veliyath, 2002; Xia & Walker,
2015). Grounded in the agency theory tradition (Berle & Means, 1991; Jensen & Meckling,
1976; Shleifer & Vishny, 1997), the current literature depicts two unique characteristics of
corporate governance in SOMNEs as compared with private multinational enterprises
(MNEs). First, the management of SOMNEs in their international activities represents socio-
political and diplomatic goals of the home government, which are often in conflict with
economic efficiency and financial performance (Bass & Chakrabarty, 2014; Boardman &
Vining, 1989; Inoue et al., 2013; Musacchio & Lazzarini, 2014; Vining & Weimer, 2016).
Second, as a shareholder, the home government has “dual influence” on the managerial
Chen et al. / Principals-Principals Perspective 3
decision of SOMNEs (Cuervo-Cazurra, Inkpen, Musacchio, & Ramaswamy, 2014: 934),

including a soft budget constraint to bail out of international risks and diplomatic ties to buf-
fer relations with host governments (Buckley et al., 2007; Cuervo-Cazurra et al., 2014;
Kornai, 1979).
The private-government PP perspective challenges this view of SOMNEs in three ways.
First, sociopolitical goals of the home government are only a partial representation of most
SOMNEs’ objective functions. A hybrid ownership structure involving government and pri-
vate shareholders is prevalent among today’s SOEs (Bruton et al., 2015; He, Eden, & Hitt,
2016). In these hybrid SOEs, the corporate governance problem lies in the contests and com-
promises between the sociopolitical and economic goals of these two shareholder groups
(government principals–private principals; He et al., 2016).
Second, existing studies of SOEs tend to focus on traditional PA conflicts between the
state and the manager, which we argue do not fully capture the problem of conflict and com-
promise between government and private blockholders and how those conflicts influence
managerial decisions. The key corporate governance issue for SOEs is not only the informa-
tion asymmetry between the principal and the agent but also the contests for control between
large private and state-backed blockholder groups through their relative influence over the
agent (i.e., managers; Crespi & Renneboog, 2010; Sauerwald & Peng, 2013).
Last, private-government PP conflicts may result in different managerial decisions under
multiple degrees of a state’s “dual influence.” SOMNEs have (a) a soft budget constraint that
can serve to reduce the downside of international risks and (b) diplomatic ties that can buffer
the relationship with the host government (Bass & Chakrabarty, 2014; Cuervo-Cazurra et al.,
2014; Duanmu, 2014; Pan et al., 2014). We suggest that the value of such dual influence may
vary under different environments at home and abroad.
Using a sample primarily from the databases of Orbis and Thomson SDC, we analyzed a
global sample of 7,564 cross-border acquisitions conducted by 4,003 MNEs from 21 home
markets into 32 host markets between 2004 and 2013. Controlling for the traditional PA and
PP conflicts via blockholder ownership concentration, we found that the propensity of com-
pleting a deal and the deal value (after completion) had a U-shaped relationship with govern-
ment blockholder ownership of voting rights. We also found evidence that the government
blockholder group appeared to have a stronger relative influence in a transaction but a higher
degree of conflict with its private counterparts when (a) the home government faced a lower
budget deficit risk and/or (b) there was no bilateral investment treaty (BIT) in force between
the home and host markets.
Theory
State-Private PP Conflicts in Cross-Border Acquisitions
Cross-border acquisitions represent risky strategies to pursue asset growth and/or corporate
diversification. It is widely accepted that CEOs often favor large cross-border acquisitions as
a way to advance personal status, privilege, and new job opportunities or simply due to mana-
gerial hubris—all at the expense of shareholder value (Denis, Denis, & Sarin, 1999; Miller,
Breton-Miller, & Lester, 2010; Seth et al., 2000, 2002). In hybrid firms, monitoring of manag-
ers to prevent overexpansion through cross-border acquisitions will depend on whether gov-
ernment and private blockholders have incentives to do so given their conflicting objectives.
As empirically evidenced by the multiple-blockholder conflict literature (Attig et al.,

2013; Edmans & Manso, 2011; Seth et al., 2000, 2002), blockholder PP contests for control
induce rival blockholders to strengthen their monitoring in managerial decisions if they think
that such acquisitions will disproportionally benefit the opposing blockholding group.
Government blockholders may be coordinated through politically imposed objectives and
procedures (e.g., through the Minister of Finance, another government agency, or directly as
a country’s budget planning; Musacchio & Lazzarini, 2014), whereas private blockholders
may be more dispersed—for instance, by expressing individual concerns to the manager to
avoid diverting firm resources for the government’s diplomatic and political purposes.
Private shareholders generally see cross-border acquisitions as a strategy to ultimately
increase profits and economic value for their overall portfolio (Seth et al., 2000). They may
seek different intermediate benefits in acquisitions, such as financial returns over a certain
period, control of new strategic resources for pricing power, or long-term wealth preservation
for the family, but the interests of private blockholders should be relatively more aligned
because the ultimate common interests underlying these concerns are generally economic. In
contrast, government shareholders may seek large cross-border acquisitions for diplomatic or
political reasons as well—say, to support a foreign economy, to show might, to secure natural
resources, to secure a position in a strategic geography, to benefit national champions or
political allies in the home country, and for other political or public interests. In fact, the
state-backed blockholders may pursue these objectives enabled by the fact that state-owned
firms have a soft budget constraint (Buckley et al., 2007; Cuervo-Cazurra et al., 2014; Kornai,
1979) and/or diplomatic ties abroad (Duanmu, 2014; Pan et al., 2014). Additionally, the goal
conflicts between the private and government blockholders are caused by their preferred
agency arrangements. Private blockholders prefer professional managers, objectively defined
corporate objective functions, as well as financial performance-based incentives, whereas
government owners may favor appointments from political relations (Boubakri, Cosset, &
Saffar, 2008), adaptation of corporate objective functions to their constituencies’ societal
interests (Cazurra, Inkpen, Musacchio, & Ramaswamy, 2014), and managerial performance
measures in subjective, nonmarket-based terms (O’Connor, Deng, & Luo, 2006).
In theory, government and private blockholders can support a transaction because of its
economic value. In practice, however, the fundamental agency problem of information
asymmetry and incomplete contracts may cause the inevitable conflict or distrust of each
other (Eisenhardt, 1989). The conflict lies in both groups’ incomplete perception or misper-
ception of the other one’s goals behind a deal (Osborne, 2010). Rival blockholders may not
be able to find an effective way to access information about each other’s objectives, because
there is no direct contract between them. Thus, they may have to rely on their effective com-
munications with the shared agency (e.g., board of directors or the CEO). Such communica-
tions with the agency also bear problems and costs of information asymmetry and incomplete
contracts, causing information misrepresentation and perhaps further distrust and conflicts.
For instance, even if a deal looks attractive economically, when the government has more
voting power, private blockholders tend to discount the returns differently, given the possi-
bility that government blockholders may extract political benefits in the future. Similarly, if
private blockholders have more influence over the management, then government block-
holders have to monitor the managers more closely, in case they are taking actions that are
creating shareholder value but have low or negative sociopolitical spillovers (e.g.,
downsizing). It is the distrust between the two groups that induces them to strengthen the
monitoring of management to prevent it from pursuing risky projects, such as large cross-
border acquisitions, which may benefit one group at the expense of the other one (Osborne,
2010).
When there is an even balance of power between the two groups of blockholders (private
vs. government), it is difficult for the manager to pursue a large-scale acquisition, unless it
benefits the two groups of actors jointly (and managers as well). First, the manager has to
find acquisitions that economically benefit both blockholder groups and satisfy the sociopo-
litical objectives of the government. This is something that may be difficult to achieve,
because multiple conflicting goals make the sociopolitical performance difficult to measure
and, thus, the optimization of decisions complicated (Eisenhardt, 1989; Jensen, 2002).
Second, as discussed, when blockholders are in conflict, both groups tend to strengthen their
monitoring of managers to prevent them from siding with the other shareholders. With
increases in this type of monitoring, managers would see their ability to make large invest-
ments abroad for self-interest or hubris also constrained (Denis et al., 1999; Seth et al., 2002).
This is an offsetting effect of the traditional kind of agency cost (Attig et al., 2013; Edmans
& Manso, 2011; Seth et al., 2000, 2002). The difference between these two types of monitor-
ing is that the traditional kind of monitoring is only over managerial self-interest or hubris,
whereas the offsetting type is over a manager’s potential siding with other shareholders. As
a result, when private and government blockholders contest for control, managers have to
either find investment plans that satisfy all blockholding groups or look for small cross-bor-
der deals that can fall below the blockholders’ monitoring threshold (Miller et al., 2010).
Grounded on empirical evidence from existing literature (Boubakri et al., 2008), our the-
ory was developed on the assumption that the agent (CEO and board of directors) proportion-
ally represents the interests of large shareholders. For instance, Boubakri et al. (2008) studied
a sample of 245 firms in 27 developing and 14 developed countries from 1980 to 2002 and
found that politically connected board membership was strongly positively related to state
ownership. When private-government PP conflict is low, there is also more likelihood that
agents have their objectives aligned with those of the largest blockholding group (following
the logic of concentrated ownership). Yet, the contest between the private and government
blockholders for control may lead to less agency cost because both blockholding groups
intensify their monitoring of management to prevent it from catering to the interests of the
other coalition of shareholders.
Similarly, when the government blockholding group has low voting power (and thus can
only weakly impose its sociopolitical goals over managerial decisions), dominant blockhold-
ers are private and therefore may have more aligned logics toward economic interests.
Therefore, private blockholders as a group would fear less that the CEO is siding with the
government for sociopolitical goals. The fact that blockholder interests are aligned leads to
clearer objective functions for managers and, in turn, makes selecting a large acquisition
project easier. In this scenario, the power of private blockholders can focus the firm on pursu-
ing acquisitions that generate economic outcomes. Therefore, we propose the following:
Hypothesis 1: The higher the concentration of voting rights into either type of blockholder group
(government or private), the higher the propensity of completing and the larger the size of a
cross-border acquisition.
Institutional Contexts of the Home State’s Dual Influence

The existing literature differentiates SOMNEs from the private MNEs for their conflicts
as the home government’s “dual influence” arises (i.e., a soft budget constraint and diplo-
matic services)—a unique ability of the government that helps scale a foreign investment for
sociopolitical rather than economic goals (Cuervo-Cazurra et al., 2014: 934). We argue that
such influence depends on the home and host country institutions and so do the related
conflicts.
On the home front, SOMNEs’ soft budget constraint allows their managers to pursue non-
economic interests, which increase private blockholders’ mistrust in the management. The
soft budget constraint is, to a large extent, contingent on the state of the home government’s
fiscal deficit or fiscal fragility (Leeper, Walker, & Yang, 2010). The reason is that large
investments of SOEs, more often than not, require approval by the government or are
included in the government’s fiscal budget (Musacchio & Lazzarini, 2014). Government
investments (including cross-border acquisitions) focus on long-term benefits rather than
immediate needs and are therefore especially sensitive to the budget balance risks and to
potential budget cuts (Musacchio & Lazzarini, 2014: 173-177; Roubini, Sachs, Honkapohja,
& Cohen, 1989: 108-109). An increase in home budget risk would tighten the budget con-
straint of the home government and limit its financial slack to support an SOMNE’s large
acquisition. Thus, it would weaken the government blockholders’ overall influence over
managerial decisions and subsequently require a higher percentage of formal voting rights to
control a deal.
At the same time, in the face of an increased risk of a budget deficit, it becomes the
SOMNEs’ financial responsibility to generate profits and financial returns to close the gap
between government spending and revenue. Consequently, when the budget has less slack,
the government blockholder group has converging interests with its private counterparts in
terms of wanting SOMNEs to generate profits, and both groups become more aligned to
discipline managers to pursue profitability. This ends up reducing the degree of government-
private blockholder conflicts.
Hypothesis 2: Increased (decreased) risk in the home budget balance would weaken (strengthen) the
relative influence of the government blockholder group in a cross-border acquisition and reduce
(increase) the degree of government-private blockholder conflicts.
On the host front, every cross-border acquisition is a boundary spanning into an institu-
tionally different market, where the MNE may be competing not only with local private firms
but also with host SOEs, as well as interacting with the host governments. Foreign investors
thus bear innate liabilities of foreignness due to their unfamiliarity with local institutions,
causing potential uncertainty and transaction cost to overcome such liabilities. To compen-
sate for such liabilities of foreignness, many countries have signed BITs, which establish
terms and conditions for private investments from foreign nations (Elkins, Guzman, &
Simmons, 2006). BITs typically offer a formal regulatory framework to protect foreign pri-
vate investors in foreign direct investment (FDI) admission, treatment, expropriation, and the
settlement of disputes (Elkins et al., 2006). Ex ante, BITs introduce transparency regarding
the regulatory and policy procedures for investments in the signing countries; ex post, they
ensure that private investors are protected for their property rights and preserved from
expropriation (Egger & Pfaffermayr, 2004). In some sense, BITs extend a foreign investor’s
property rights and regulate how host states must arbitrate disputes, reducing arbitrary power
of the host governments in state-foreign investor relations (Egger & Pfaffermayr, 2004).
Despite these benefits for foreign private investors, many countries—including some
large FDI host countries, such as Brazil—are resistant toward some of the international
investment principles and thus reluctant to sign BITs (Elkins et al., 2006). The absence of a
BIT may allow host governments to discriminate among different investors abroad. It requires
foreign investors to negotiate with the host state on a case-by-case basis for terms and condi-
tions, increasing the power of the host government and, therefore, the risk of adverse political
actions. In this case, ties with the home governments through, for instance, ownership would
offer a foreign investor unique diplomatic networks to facilitate investments between coun-
tries (J. Li, Meyer, Zhang, & Ding, in press) and increase the negotiation power against the
host state (J. Li, Newenham-Kahindi, Shapiro, & Chen, 2013).
Holding all else equal, diplomatic resources of the home government then become a
highly valuable instrument in the absence of BITs. Government blockholders can facilitate
direct dialogue between the two states and soften the relationship between the MNEs and the
host government (Duanmu, 2014; Pan et al., 2014). Without a BIT, access to diplomatic
channels through home governments as blockholders may help MNEs to receive earlier and
better information, develop business relations, and protect MNEs from adverse host govern-
ment interference (J. Li et al., in press). Increasing (decreasing) salience of diplomatic advan-
tages in the absence (presence) of a BIT would strengthen (weaken) the government
blockholders’ relative influence in managerial decisions and thus require a lower (higher)
share of formal voting rights to control managerial decisions in a large acquisition. Such
political advantages of state ownership may, however, empower the home state to pursue its
own sociopolitical agenda by working directly with the host state behind themes and there-
fore cause increased skepticism and distrust between the state and private blockholders,
thereby increasing the PP conflicts between them.
Hypothesis 3: The presence (absence) of a BIT in force between the home and host markets would
weaken (strengthen) the relative power of the state blockholder group versus the private block-
holder group and reduce (increase) the degree of state-private blockholder conflicts.
Methods
Data Collection
We compiled a global sample of firm and deal information from multiple sources, includ-
ing Thomson Reuters SDC Platinum (SDC), Bureau van Dijk (BvD) Zephyr, BvD Orbis,
Compustat, Mergent Online, and Mergent Reports. These data sources have been widely used
in business studies (Abdi & Aulakh, 2012; Arora, Belenzon, & Rios, 2014; Bruno & Shin,
2014). Specifically, we retrieved the deal-level information of cross-border acquisitions from
a merged sample of SDC and BvD Zephyr. We consolidated overlapping deals using firm ID,
firm name, and other key deal characteristics. Then we collected the firm- and shareholder-
level information from BvD Orbis data, complemented by Compustat and Mergent, and
merged them with the deal-level information. We downloaded country- and bilateral-level
measures from a variety of sources, such as the World Bank DataBank, Centre de Recherche
Français Dans Le Domaine de L’économie Internationale, International Country Risk Guide

(ICRG) of the Political Risk Services Group, and Geert Hofstede website.
Following Miller et al. (2010), we kept only deals that were more than US$1 million and
that took >5% of blockholding in the targets, below which large blockholders may find them
too trivial to intervene. We then took further steps to ensure comparability of our sample
deals and firms (see details in online Supplement 1). After removal of further missing values,
the final sample included 7,564 complete cross-border acquisitions conducted by 4,003
acquirers (including 4,271 deals by 2,092 listed acquirers and 3,293 by 1,911 unlisted acquir-
ers) from 21 home markets into 32 host markets between 2004 and 2013.
We also downloaded a matching sample of withdrawn cross-border acquisitions during
the same period (2004–2013) that fell in the same cells as the completed deals by home mar-
ket, host market, acquirer industry (two-digit Standard Industrial Classification [SIC]), and
target industry (two-digit SIC). We removed withdrawn deals whose projected deal size was
below US$1 million and whose projected share percentage to acquire from the target was
<5%. After removal of missing observations, we eventually arrived at 682 transactions. This
suggests that 8.3% of all announced deals in our sample were eventually withdrawn, which
is similar to the findings of recent studies (e.g., 8% in Jacobsen, 2014).
Sample Characteristics
Our sample represents the properties of the overall global landscape of cross-border
acquisitions in several ways. First, our sample covers developed and emerging markets but
has a very high concentration in the former, which is consistent with the overall pattern of
large-scale global M&As. We compared the country distributions between our final sample
and the initial overall sample, as merged between Orbis and SDC, and found very similar
patterns. Specifically, in our final sample, 91.4% of transactions were conducted by MNEs
from developed markets, primarily North America (44.2%) and Europe (42.5%). Among the
developing countries are China (1.3%), Israel (2.1%), and Singapore (1.1%). Second, our
sample represents the time variation of global M&As. In particular, the number of deals in
our sample is consistent from year to year: on average, 756 deals per annum and 168 deals
involving government blockholders in the acquirers. Naturally, we had higher numbers of
transactions during the financial crisis. Third, our final sample has a good representation of
nonfinancial industries. The target industries (in which acquisitions took place) are widely
distributed: 8.9%, primary sectors (agriculture, forestry, fishing, and mining); 38.6%, manu-
facturing; 7.4%, construction, transport/infrastructures, and utility; 4.9%, trade; and 40.2%,
services.
Variables and Measures

Dependent Variables
Propensity of completion. This binary variable is 1 if a cross-border acquisition was com-
pleted after public announcement and 0 if eventually withdrawn.
Acquisition size. Shareholders are sensitive to the relative size of an acquisition as a por-
tion of the size of the acquirer: that is, what percentage of the firm’s assets has been utilized
for the acquisition project (Hayward, 2002; Moeller, Schlingemann, & Stulz, 2005). We mea-
sure the acquisition size as the deal value as a percentage of the acquirer’s preacquisition total
assets. Since most deals are relatively small as compared with the acquirer size, we scaled the
measure using the unit of percentage points (p.p.; e.g., 1% is translated into 100 p.p.).
Independent and Moderating Variables

Government blockholding. We measured government blockholding as the total percent-
age of voting shares of all government blockholders based in the acquirer’s home nation
(i.e., shareholders that possessed at least 5% of a focal firm’s voting shares). Following BvD
data, we used total voting shares, including direct and indirect voting shares. We take a broad
definition of who the state actors are that can be part of the government blockholding group.
We include direct ownership stakes by the treasury, by state-owned holding companies, pro-
vincial and municipal governments, provincial or state equity investment funds, local sov-
ereign wealth fund investments, state-linked pension funds, state-owned banks, and indirect
ownership stakes (i.e., of companies that are in turn controlled by the government), following
Orbis’s coding. We included only blockholders because smaller shareholders are usually not
willing or able to monitor and challenge the management, for which the cutoff points are set
≥5% (Connelly, Hoskisson, Tihanyi, & Certo, 2010; Daily, Dalton, & Cannella, 2003; for an
international study, see D. Li, Moshirian, Pham, & Zein, 2006).
Home budget balance risks. This measure is based on the yearly increase of the ICRG’s risk
for budget balance index, which rates the risk points of a government’s budget balance from 0 to
10, with higher points suggesting lower risk. We reserved this index so that the higher the points
of our measure, the higher the increase in the risk of balancing a home state’s budget.
BIT with host. This dummy is measured as 1 if the home market has a BIT in force with
the host market during the year of acquisition. This information is available from United
Nations Conference on Trade and Development.
Control Variables
First, we controlled for both moderating variables mentioned earlier. Second, we con-
trolled for five acquirer-level characteristics that are likely to affect the acquisition size.
Specifically, to control for the traditional PA and PP costs, we followed Su et al. (2008) and
included the acquirer’s Herfindahl 10, measured as the total sum of squares of each of the top
10 shareholders’ percentage of voting rights. To control for the impact of public status of the
acquirer, we included acquirer public status dummy (1 for yes, 0 for no). Next, we followed
Ang, Benischke, and Doh (2015: 1545) and controlled for acquirer cross-border M&A expe-
rience, measured as the logarithm of total number count of cross-border acquisitions by the
same acquirer in the last 5 years. Finally, we controlled for acquirer size and acquirer profit-
ability, respectively measured as the natural logarithm of predeal net sales (in US$1 million)
and predeal earnings before interests, taxes, depreciation, and amortization (EBITDA):total
assets ratio. We use EBITDA rather than net income, which is more often used in single-
country studies, because EBITDA is not affected by country-specific regimes in taxes, inter-
est rates, and accounting rules (e.g., amortization rules), which are not a result of firm-specific
performance.
Second, we controlled for three home market economic and institutional characteristics,
which may affect cross-border acquisitions. The first is home minority investor protection,
which is a potential legal means for the minority shareholders to ensure accountable directors
and managers for value creation in acquisitions. We used a newly developed index by Guillén
and Capron (2016) that, when compared with alternative measures, has a broader coverage
of composites (considered subnational laws) and, more important, is the only data that cover
our sample’s entire time span. We normalized this measure by dividing the original value by
the global mean value of the year. The other two, following the literature on FDI determi-
nants (Globerman & Chen, 2010), are home GDP, measured as the natural logarithm of GDP
in US$ billion, and home government stability, a measure retrieved from ICRG.
Third, we controlled for two target-level characteristics. They are target size (not to be
confused with our dependent variable deal size) and target profitability, respectively mea-
sured as the natural logarithm of predeal net sales (in US$1 million) and predeal EBITDA:total
assets ratio. Fourth, we controlled for three host market economic and institutional character-
istics, following the recent literature on FDI (Globerman & Chen, 2010). They include host
GDP, measured as the natural logarithm of GDP in US$ billion from the World Bank data,
host rule of law, and host unemployment. Host rule of law is the rate of law and order from
ICRG; host unemployment is the reverse of the risk rate for unemployment from ICRG. We
normalized both measures from ICRG by dividing the original values by the global means of
each year. Fifth, at the deal level, we controlled for shares acquired in target and industry
relatedness. The prior is the percentage of equity ownership that the acquirer acquired in total
from the target. Following recent studies on M&As (Patel & King, 2015), industry related-
ness is measured as 1 if two firms share the same four-digit SIC codes, 0.75 if three- but not
four-digit SIC codes, 0.5 if two- but not three-digit SIC codes, 0.25 if one- but not two-digit
SIC codes, and 0 if different one-digit SIC codes. We also controlled for three dummies of
the method of payment: cash payment dummy, debt payment dummy, and stock payment
dummy. Each dummy takes the value of 1 if the method was involved in the payment and 0
otherwise. The sum of these three dummies is >1 because some deals involved multiple
methods of payment.
Sixth, we controlled for a series of distance measures between the home and host markets,
including geographic distance, economic distance, demographic distance, and cultural dis-
tance. Geographic distance is the distance between major metropolitan cities of home and host
markets weighted by each city’s population. These data are directly available from the Centre
de Recherche Français Dans Le Domaine de L’économie Internationale. The other three dis-
tance measures all followed Berry, Guillén, and Zhou (2010) and were calculated with the
Mahalanobis method, which is scale free and takes into consideration the variance-covariance
matrix. Specifically, economic distance is the Mahalanobis distance between the home and
host markets in income (GDP per capital in 2000 U.S. dollars), inflation (GDP deflator as
percentage of GDP), exports (exports of goods and services as percentage of GDP), and
imports (imports of goods and services as percentage of GDP). Demographic distance is the
Mahalanobis distance in life expectancy at birth (years), birth rate (crude per 1,000 people),
population aged <14 years as a percentage of total, and population aged ≥65 years as a per-
centage of total. Cultural distance is the Mahalanobis distance in Hofstede’s dimensions of
power distance, individualism, masculinity, and uncertainty avoidance.
Finally, we included a series of context-related dummies—including home dummies, host
dummies, industry dummies (based on two-digit SIC codes at the target level), and year
dummies—to control for potential fixed effects related to home and host markets, industries
in which the acquisition took place, and time.
Estimation Strategy
We conducted our analysis at the transaction level for two key advantages over an other-
wise firm-level study. First, the characteristics of each deal (e.g., propensity of completion,
size) are affected not only by the acquirer and home market factors but also largely by the
target, target industry, host market, and bilateral factors, as well as other deal characteristics,
such as method of payment, industry relatedness, and shares acquired. A transaction-level
analysis enables us to control for all these factors and thus make sure that our findings on the
relationship between government ownership and acquisition size is not confounded by any
target, host market, and bilateral factors or other deal characteristics. Second, using deal-
level data allows us to do a more realistic simulation of how large blockholders respond to a
cross-border deal, as opposed to using firm-level variables, such as total deals and dollar
amount spent on these deals by acquirers in a given year. Large blockholders do not respond
to the aggregated measures of cross-border deals of a firm at the end of each year but to every
attempted deal so that they can consider each deal’s idiosyncrasies.
To control for potential selection hazard due to exclusion of withdrawn deals as well as to
test for the propensity outlined in H1, we adopted a two-step Heckman-style selection model
in which the first step is a probit regression on the propensity of completion (Heckman,
1979). Here we model the (conditional) probability of completion, that is, Yi = 1, as
 K

P Yi = 1 = Φ  β0 +


∑β X
k =1
k ki ,


where Φ ( ⋅) is a cumulative distribution function of the standard normal distribution.

For the first step test, we added three new control variables to control for any fixed effects
of the overall environment in the host market that may cause withdrawals. The first is with-
drawn deals, home-host-year, measured as the logarithm of the total number count of with-
drawn deals between the home-host country pair in each year. The other two are withdrawn
deals by foreign SOEs in host and withdrawn deals by home SOEs in host—measured as the
logarithm of the count of withdrawn deals by all foreign SOEs and home SOEs, respectively,
in the last 5 years. We used a different time horizon for the latter two control variables
because they are highly correlated with the first if the same time horizon is used. In the sec-
ond step, we included the inverse Mills ratio from the first step as an additional control vari-
able (Heckman, 1979).
Before selecting the estimation specification in the second step, we examined the distribu-
tion of acquisition size. It was highly positively skewed and overly peaked: the skewness was
20.25, as opposed to the normal distribution range between –1 and 1; the kurtosis was 594.53,
as compared with the normal distribution score of 3. An appropriate technique is to adopt the
generalized linear model (GLM), which fits our needs for three reasons (Hardin & Hilbe,
2007). First, as compared with ordinary linear regressions, GLM does not require a normal
distribution of the dependent variable (Hardin & Hilbe, 2007). As explained, our dependent
variable is always positive and continuous. For such a distribution, a gamma family is appro-
priate (Hardin & Hilbe, 2007). Second, GLM offers a relatively high flexibility for choosing
the link function between the dependent and right-hand-side variables. Given the high skew-
ness and kurtosis of the dependent variables, we used natural logarithm as the link function
to normalize the distribution. After logarithm, the distribution is approximately normal, with
a skewness of 0.88 and a kurtosis of 2.72. Third, compared with a tobit model, which is typi-
cally used for nonnegative dependent variables, GLM does not require a corner solution,
such as zero values at the lower bound (Hardin & Hilbe, 2007). Therefore, GLM fits our
dependent variable, which is always positive.
Before we started our regression analysis, we further examined the blockholder character-
istics for two potential endogeneity concerns. The first was reverse causality—that is, gov-
ernment blockholding changes prior to an acquisition to reflect PP conflicts. We examined
the changing patterns of government blockholding prior to the acquisition announcement to
ensure no endogeneity due to reverse causation. The minimal changes in government owner-
ship suggest that a cross-border acquisition has little impact on the change in government
ownership prior to the deal. We also concluded a weak correlation (p > .1) between the gov-
ernment ownership change prior to a deal and the acquisition size, implying that there is
unlikely any unobserved factor that causes both to correlate. The second was potential reverse
selection—that is, PP conflicts may prevent a firm from taking on an acquisition abroad to
begin with. While we do not have sufficient ownership data to create a matching sample of
nonacquiring firms, we reason that, if this were the case, our sample reflects only a conserva-
tive estimation of PP conflicts. Therefore, we tested a relatively weaker form of PP conflicts
(i.e., not enough tensions to stop entirely the acquisition announcement), whereas the actual
PP conflicts would be even more strongly supported than what our statistical findings show.
Following Haans, Pieters, and He (2016), we tested the two moderating effects (H2 and
H3) based on the two graphic features of the baseline U-shaped relationship between acquisi-
tion size and government blockholding. These two features are the turning point and the
curvature of the U curve, each of which follows a distinct mechanism. Specifically, the turn-
ing point suggests the minimum percentage of formal voting rights that the government
shareholders should hold to control the managerial decision in an international acquisition,
reflecting the de facto overall influence that the government blockholders have over manage-
rial decisions. A left (right) shift in the turning point suggests their need for a lower (higher)
percentage of voting rights for control and thus a stronger informal influence.
The second feature—curvature of the U shape—suggests the degree of government-
private shareholder conflicts in terms of its sensitivity to the scale of an acquisition. When
the government and private blockholders contest for control, there is the possibility of having
conflicting goals, something that would pressure the manager to reduce the size threshold of
deals to avoid shareholder intervention and to lower the risk level of such investments. Thus,
the curvature strengthens (flattens) when government and private goals become more con-
flicting (aligned).
Results
In Table 1, we report summary statistics of government ownership by home market. Based
on chi-square tests, the distributions are similar to the overall sample of large cross-border
acquisitions in BvD and SDC. SOMNEs (defined as having at least one government block-
holder) represent a small minority of all MNEs in cross-border acquisitions. Among all the
7,564 complete deals, 1,676 (or about 22.16%) deals involved at least one government
Table 1
Selected Summary Statistics of Government Blockholders by Home Market
Deals with a government Government

Deals blockholder blockholding
Home market n % n % %a M SD
North America
Canada 589 7.8 168 10.0 28.5 0.12 0.22
United States 2,752 36.4 198 11.8 7.2 0.04 0.15
Europe
Denmark 65 0.9 23 1.4 35.4 0.12 0.23
Finland 149 2.0 67 4.0 45.0 0.13 0.23
France 256 3.4 66 3.9 25.8 0.11 0.24
Germany 172 2.3 41 2.4 23.8 0.08 0.20
Italy 92 1.2 16 1.0 17.4 0.11 0.24
Netherlands 190 2.5 13 0.8 6.8 0.07 0.18
Norway 115 1.5 58 3.5 50.4 0.12 0.32
Spain 95 1.3 14 0.8 14.7 0.08 0.22
Sweden 311 4.1 176 10.5 56.6 0.11 0.21
Switzerland 145 1.9 17 1.0 11.7 0.09 0.24
United Kingdom 1,190 15.7 371 22.1 31.2 0.08 0.23
Others
Australia 435 5.8 144 8.6 33.1 0.08 0.26
China 98 1.3 18 1.1 18.4 0.19 0.24
India 252 3.3 134 8.0 53.2 0.13 0.29
Israel 156 2.1 44 2.6 28.2 0.13 0.26
Japan 301 4.0 28 1.7 9.3 0.04 0.11
Singapore 85 1.1 10 0.6 11.8 0.11 0.21
South Africa 58 0.8 35 2.1 60.3 0.13 0.18
South Korea 58 0.8 35 2.1 60.3 0.17 0.23
Total 7,564 100.0 1,676 100.0 22.2 0.08 0.22
aPercentage based on all deals from this market.
blockholder (i.e., ≥5% total voting shares). In fact, in each of the 21 home markets in our
sample, at least 10 deals involved government shareholders in acquirer firms. Among all the
acquirers, Chinese firms on average had the highest government blockholding (19%), while
American and Japanese firms had the lowest (4%).
Table 2 reports descriptive statistics and the correlation matrix of all the variables (in both
steps). First, under the rule of thumb with ±.60 correlation and a variance inflation factor of
5 (Anderson, Sweeney, Williams, Camm, & Cochran, 2013; Griffiths, Hill, & Judge, 1993)
as the cutoff points, the results suggest that our sample presents no severe multicollinearity
problems among independent and control variables. Because a significant proportion of
acquirers (about 30%) conducted multiple acquisitions in our sample, we report standard
errors clustered by firm identity, controlling within-cluster covariance.
Table 3 shows the main tests of our H1. It reports the first-step probit regressions on pro-
pensity and the second-step GLM regressions on acquisition size. In Model 1, government
blockholding slightly decreases (–0.07) the propensity to complete a deal, but the coefficient
14
Table 2
Summary Statistics and Correlation Matrix
M SD 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 VIFa VIF
1: Propensity of
completiona 0.93 0.26
2: Acquisition size 9.95 60.13 —
3: Government blockholding 0.08 0.21 −.03 −.04 1.06 1.06
4: Home budget balance risk 0.42 1.49 .08 .05 −.09 1.70 1.83
5: BIT with host 0.15 0.35 .01 .05 .05 −.09 1.13 1.27
6: Herfindahl 10 index 0.41 0.46 .06 −.01 .09 −.04 .00 1.29 1.34
7: Acquirer public status dummy 0.57 0.50 .14 −.02 −.06 .04 .03 −.40 1.34 1.36
8: Acquirer cross-border M&A experience 0.57 0.95 .11 .00 −.11 .08 −.02 −.10 .15 1.23 1.25
9: Acquirer size −0.45 6.93 −.01 −.15 .07 −.03 .14 −.24 .29 .17 1.40 1.42
10: Acquirer profitability −0.13 8.77 −.03 .00 .00 .02 .01 −.01 −.01 .00 −.01 1.00 1.00
11: Home minority investor protection 0.90 1.58 −.57 .03 −.04 .04 −.08 .02 −.13 −.07 −.10 .02 1.14 1.24
12: Home GDP 14.96 1.37 .10 .08 −.17 .59 −.22 .10 −.12 .07 −.27 .01 .23 2.68 3.91
13: Home government stability −0.24 1.19 −.06 .03 −.01 −.05 −.04 .05 −.05 −.03 −.10 .01 .15 −.01 1.07 1.08
14: Target size −2.88 5.13 −.07 .07 −.07 .08 −.02 .02 .01 .18 −.04 .01 .05 .14 .00 1.28 1.36
15: Target profitability 0.01 0.12 −.04 .02 .00 −.01 .00 .01 −.01 −.01 .01 .00 .03 −.02 .02 −.01 1.00 1.04
16: Host GDP 14.47 1.34 .05 −.01 −.01 .08 −.23 −.07 .11 .07 .09 .00 −.07 −.01 −.07 .00 .00 1.43 2.22
17: Host rule of law 1.11 0.95 −.01 .03 −.05 .05 −.24 −.03 .09 .03 −.01 .01 .03 .05 .04 .22 .01 .24 1.54 1.41
18: Host unemployment risk −0.90 0.83 −.01 −.01 .05 .00 .18 −.04 .04 −.04 .07 .00 −.03 −.10 .00 −.10 −.01 −.20 −.43 1.30 1.25
19: Shares acquired in target 0.86 0.30 −.02 .01 .07 −.05 −.02 −.17 .16 −.29 .07 .00 −.01 −.13 −.01 −.30 .01 .06 .01 .05 1.36 1.48
20: Industry relatedness 0.52 0.32 −.02 .01 .03 −.03 .03 −.05 .09 −.11 .03 .01 −.01 −.09 −.03 −.06 .00 −.01 −.02 .03 .21 1.07 1.08
21: Geographic distance 8.86 0.70 .19 .02 −.05 .19 −.09 .03 −.02 .08 −.16 .00 .00 .32 .04 −.13 .01 .17 −.08 .00 −.09 −.06 1.41 1.46
22: Economic distance 7.95 3.65 .01 .06 −.10 .28 −.23 .04 −.05 .03 −.16 .00 .16 .47 .07 −.01 .00 .10 .13 −.17 −.02 −.04 .19 1.59 3.07
23: Demographic distance 4.40 0.62 −.02 −.04 −.04 .04 .06 −.10 .10 .09 .29 .00 .00 −.05 −.05 .21 .00 .04 .21 −.03 −.06 −.03 −.30 −.09 1.37 1.55
24: Cultural distance 5.97 0.84 −.02 .01 −.03 .09 −.05 −.01 .01 .05 −.05 .01 .05 .02 .01 .00 .01 −.09 .09 −.04 −.08 −.06 .06 .27 .07 1.19 1.28
25: Withdrawn deals, home-host-yeara 0.16 0.43 −.03 — −.03 .02 −.12 .02 −.08 .12 −.11 −.01 .02 .15 .01 .02 .00 .06 .03 −.05 −.17 −.05 .19 .08 −.07 −.02 1.15 —
26: Withdrawn deals by foreign SOEs 1.10 1.45 .03 — .02 .01 −.18 −.07 .14 .02 .10 −.01 −.02 −.11 −.05 −.08 .01 .48 .30 −.17 .12 .02 .20 .15 −.14 .02 .11 1.71 —
in hosta
27: Withdrawn deals by home SOEs in 0.00 0.07 −.02 — .01 −.01 −.02 −.02 .01 .02 .04 .00 .02 −.01 .03 −.02 .00 .04 .02 −.01 .00 .00 .01 .00 .00 −.03 .16 .07 1.04 —
hosta
28: Cash payment dummy 0.83 0.38 — .01 .01 .15 −.06 .02 .00 .04 −.03 −.01 −.07 .09 .11 .04 .00 .04 .04 −.01 −.08 .00 .07 .07 −.05 .05 — — — — 1.09
29: Debt payment dummy 0.06 0.24 — .05 −.06 −.10 .01 .08 −.06 −.05 −.07 .00 .06 −.02 −.03 −.04 .00 −.04 −.04 .02 .08 .01 −.03 .01 −.01 −.04 — — — −.01 — 1.08
30: Stock payment dummy 0.12 0.32 — −.02 .06 −.18 −.03 −.16 −.05 −.14 −.13 .00 .09 −.07 −.05 −.12 −.06 −.08 −.03 −.02 .11 .04 −.04 −.04 −.09 −.02 — — — .11 .21 — 1.19
Note: N = 7,564. Correlations >|.03| are statistically significant at p < .05. VIF = variance inflation factor; BIT = bilateral investment treat; M&A = merger and acquisition; GDP = gross domestic
product; SOE = state-owned enterprise.
an = 8,246 for Heckman stage 1 probit model.
Table 3
Main Results
Probit on completion GLM on acquisition size
1 2a 3 4 5 6 7 8
Gov blockholding −0.07 −3.82*** −0.52*** −2.67*** −2.79*** −3.02*** −3.13***

(0.27) (0.91) (0.15) (0.46) (0.46) (0.52) (0.51)
(Gov)2 5.03*** 2.58*** 2.79*** 3.02*** 3.21***
(1.20) (0.58) (0.58) (0.65) (0.65)
Gov × Home Budget 0.62** 0.62*
Balance Risk (0.24) (0.24)
(Gov)2 × Home Budget −0.86** −0.85**
Balance Risk (0.30) (0.30)
Gov × BIT With Host 1.85* 1.79*
(0.80) (0.78)
(Gov)2 × BIT With Host −2.37* −2.29*
(0.99) (0.96)
Home budget balance −0.03 −0.07 −0.02 −0.03 −0.02 −0.03 −0.02 −0.03
risk (0.13) (0.14) (0.04) (0.04) (0.04) (0.04) (0.04) (0.04)
BIT with host 0.82** 0.74** 0.17+ 0.15+ 0.17+ 0.16+ 0.10 0.10
(0.29) (0.29) (0.09) (0.09) (0.09) (0.09) (0.10) (0.10)
Herfindahl 10 index −6.87*** −6.92*** −2.32*** −2.10*** −2.03*** −2.02*** −2.02*** −2.01***
(0.83) (0.86) (0.44) (0.45) (0.44) (0.44) (0.44) (0.44)
(Herfindahl 10 index)2 7.08*** 6.96*** 2.04*** 1.83*** 1.74*** 1.73*** 1.72*** 1.71***
(0.80) (0.82) (0.44) (0.45) (0.44) (0.44) (0.44) (0.44)
Acquirer public status 0.10 0.16 0.01 0.02 0.01 0.01 0.01 0.01
dummy (0.16) (0.16) (0.07) (0.07) (0.07) (0.07) (0.07) (0.07)
Acquirer cross-border 0.26* 0.29** 0.24*** 0.23*** 0.22*** 0.22*** 0.22*** 0.22***
M&A experience (0.10) (0.11) (0.06) (0.06) (0.06) (0.06) (0.06) (0.06)
Acquirer size −0.04** −0.04** −0.32*** −0.32*** −0.32*** −0.32*** −0.32*** −0.32***
(0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01)
(continued)
15
16
Table 3 (continued)
1 2a 3 4 5 6 7 8
Acquirer profitability −0.00 −0.00 0.00*** 0.00*** 0.00*** 0.00*** 0.00*** 0.00***
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Home minority −1.30*** −1.30*** −0.00 −0.00 −0.00 −0.00 −0.00 −0.00
shareholder (0.08) (0.09) (0.02) (0.02) (0.02) (0.02) (0.02) (0.02)
Home GDP −0.85 −1.11 0.28 0.29 0.32 0.36 0.34 0.38
(0.68) (0.71) (0.25) (0.25) (0.25) (0.25) (0.25) (0.25)
Home government 0.09 0.07 0.08*** 0.08*** 0.08** 0.08** 0.08** 0.08**
stability (0.08) (0.08) (0.02) (0.02) (0.02) (0.02) (0.02) (0.02)
Target size −0.08*** −0.07*** 0.03*** 0.03*** 0.03*** 0.03*** 0.03*** 0.03***
(0.02) (0.02) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01)
Target profitability 0.00 0.00 0.20 0.21 0.21 0.21 0.21 0.21
(0.00) (0.00) (0.16) (0.16) (0.16) (0.16) (0.16) (0.16)
Host GDP −0.81 −0.62 −0.00 0.04 0.03 0.04 0.02 0.04
(0.50) (0.52) (0.18) (0.18) (0.17) (0.17) (0.17) (0.17)
Host rule of law −0.42 −0.36 −0.19 −0.18 −0.14 −0.15 −0.14 −0.14
(0.45) (0.46) (0.17) (0.17) (0.18) (0.18) (0.18) (0.18)
Host unemployment risk 0.29 0.39 −0.04 −0.03 −0.02 −0.02 −0.02 −0.02
(0.22) (0.24) (0.08) (0.07) (0.07) (0.07) (0.07) (0.07)
Shares acquired in target −0.19 −0.20 0.36** 0.36** 0.36** 0.36** 0.36** 0.37**
(0.25) (0.26) (0.12) (0.12) (0.12) (0.11) (0.12) (0.11)
Industry relatedness 0.19 0.21 −0.05 −0.05 −0.04 −0.05 −0.05 −0.05
(0.22) (0.23) (0.09) (0.09) (0.09) (0.09) (0.09) (0.09)
Geographic distance 0.55*** 0.50*** 0.13* 0.12* 0.11* 0.11* 0.11* 0.11*
(0.13) (0.14) (0.05) (0.05) (0.05) (0.05) (0.05) (0.05)
Economic distance −0.02 −0.02 0.12** 0.12** 0.12** 0.12** 0.12** 0.13**
(0.07) (0.07) (0.04) (0.04) (0.04) (0.04) (0.04) (0.04)
Demographic distance −1.32+ −1.52* −0.28 −0.20 −0.29 −0.33 −0.32 −0.36
(0.69) (0.69) (0.52) (0.52) (0.52) (0.52) (0.52) (0.52)
(continued)
Table 3 (continued)
1 2a 3 4 5 6 7 8
Cultural distance −0.47 −0.48 0.16 0.26 0.20 0.15 0.19 0.14
(0.43) (0.44) (0.18) (0.19) (0.18) (0.17) (0.18) (0.17)
Withdrawn deals, home- −0.76*** −0.80***
host-year (0.19) (0.20)
Withdrawn deals by −0.27* −0.30*
foreign SOEs in host (0.12) (0.13)
Withdrawn deals by 0.19 0.22
home SOEs in host (1.18) (1.27)
Cash payment dummy −0.01 −0.01 −0.02 −0.02 −0.02 −0.02
(0.07) (0.07) (0.07) (0.07) (0.07) (0.07)
Debt payment dummy 0.85*** 0.83*** 0.88*** 0.87*** 0.89*** 0.88***
(0.21) (0.21) (0.22) (0.22) (0.22) (0.22)
Stock payment dummy −0.31** −0.27* −0.29** −0.30** −0.29** −0.30**
(0.11) (0.12) (0.11) (0.11) (0.11) (0.11)
Inverse Mills ratio −0.23+ −0.20 −0.22+ −0.23+ −0.22+ −0.23+
(0.13) (0.13) (0.12) (0.12) (0.12) (0.12)
Constant 30.37** 33.42** −4.50 −5.83 −5.36 −5.58 −5.38 −5.65
(11.21) (11.54) (4.84) (4.79) (4.72) (4.69) (4.72) (4.69)
n 8,246 8,246 7,564 7,564 7,564 7,564 7,564 7,564
Pseudo R2 0.86 0.87
∆Pseudo R2 0.01
Chi-square 13,140.45*** 13,231.50*** 13,292.52*** 13,467.98*** 13,391.91*** 13,508.44***
∆Chi-square 91.05*** 61.02*** 175.46*** 99.39*** 116.53***
Note: Standard errors are clustered by firm identity and reported in parentheses. Every model includes year dummies, target industry dummies, home market
dummies, and host market dummies. GLM = generalized linear model; Gov = government; BIT = bilateral investment treat; M&A = merger and acquisition;
GDP = gross domestic product; SOE = state-owned enterprise.
aHeckman selection model.
+p < .1.
*p < .05.
17
**p < .01.
***p < .001.
is statistically insignificant (p > .1). This suggests that the linear function is only a weak
explanation for the relationship between government blockholding and the propensity to
complete a deal. In Model 2, which is our Heckman selection model, we included the squared
term of government blockholding and found a U-shaped relationship (p < .001) between
government blockholding and acquisition size. The pseudo R2 of the model increased by 1%
from Model 1, suggesting an increase in explanatory power. The coefficients for the number
of withdrawn deals by home, host, and year and that of withdrawn deals by foreign SOEs in
host are negative, consistent, and statistically significant (p < .001 and p < .05, respectively),
suggesting that the exclusion restrictions of the Heckman model were met (Heckman, 1977).
The overall model is effective, yielding an 87% pseudo R2. These findings are consistent with
our H1. We calculated the inverted Mills ratio based on Model 2 and included it in all main
GLM regressions in the second step.
The marginal effect of Model 2 (nonlinear probit regression) is calculated as the first-
order derivative of the probit model:
δP Yi = 1   K

δG
= δ Φ  β0 + β1G + β2G 2 +
 

∑β X
k =3
k ki 


 K

= φ  β0 + β1G + β2G 2 +


∑β X
k =3
k ki


(
 ⋅ δ β1G + β2G 2
, )
 K

= φ  β0 + β1G + β2G 2 +


∑β X
k =3
k ki  ⋅ (β1 + 2β2G )


where G is government blockholding, Xki are control variables, and φ(·) is a probability mass
function.
Inserting the estimates of coefficients of Model 2 and holding all control variables on their
means and context dummies on zeros into the presented function, we get
( )
φ −0.41 − 3.82G + 5.03G 2 ⋅ (10.06G − 3.82 ) .
This calculation suggests that the marginal effect of government blockholding (based on
Model 2) is a nonlinear function of government blockholding. Since the value inside φ(·) is
never infinite, φ(·) is always positive. This suggests that the sign of the marginal effect
is fully determined by (10.06G – 3.82). Within the range of G (0 to 1), the marginal effect is
always negative when government blockholder is smaller than approximately 3.82/10.06 ≈
38%, after which the marginal effect is always positive. Given the findings in Models 1 and
2, we simulated the probabilities of completion while holding all control variables on their
means and context dummies on zeros (Figure 1A).
Figure 1A confirms clearly our H1. In this figure, we simulated the relationships between
probability of completing a deal and government blockholding based on the marginal effects
of Models 1 and 2. The U shape (Model 2) shows that the probability of completing a deal
declines from 34.09% to 12.81% when government blockholding increases from none to
approximately 38%. After this point, the probability of completing a deal goes up to 78.81%
when government blockholding is 100%. The rightmost point (fully state owned) is much
Figure 1
Simulations of Results
Predicted relationships (A) between probability of completion and government blockholding and (B) between
government blockholding and acquisition size. Predicted moderating effects of (C) home budget balance risk and
(D) bilateral investment treaty (BIT) with host. p.p. = percentage points.
higher than the leftmost point (fully private owned). This may be due to two reasons. First,
SOMNEs tend to be more visible and thus more cautious when they announce a large trans-
action in public. Second, announced deals of SOMNEs have done more careful screening of
economic and regulatory situations by the host regulators to ensure their success.
In the right-hand side of Table 3, Specifications 3 to 6, we show the results of our GLM
estimates to study the curvature of the relationship between government blockholding voting
power and acquisition size. In these GLM regressions, we took several steps to report results
by including independent and control variables sequentially. In Model 3, we included all the
control variables. Results report a significant chi-square of 13,140.45 (p < .001), where chi-
square is based on deviance residuals, as an appropriate measure of the model’s goodness of
fit (Hardin & Hilbe, 2007). In Model 4, we further included the independent variable govern-
ment blockholding. The government blockholding coefficient is negative (β = −0.52, p <
.001), suggesting that in general a higher percentage of government blockholding leads to
lower acquisition size (if we impose a linear assumption). Chi-square increased by 91.05
(p < .001) from Model 1, suggesting a statistically significant increase in goodness of fit. In
Model 5, we added the squared term of government blockholding. Results suggest a U-shaped
and statistically highly significant relationship between government blockholding and acqui-
sition size (β = −2.67 and 2.58 for government blockholding and its squared term, respec-
tively; p < .001 for both), which supports our H1. Adding a squared term shows an increase
in the explanatory power of the model, with a chi-square increase of 61.02 (p < .001) from
Model 4.
In Figure 1B, we simulated the relationships between government blockholding and
acquisition size based on Models 4 and 5. We calculated the predicted acquisition size as the
exponential (inverse of the natural logarithm) of the predicted value of right-hand-side vari-
ables while holding all control variables on the mean values and context dummies on zeros.
The turning point of this baseline U relationship (Model 5) is slightly over 50% government
blockholding. Economically, the leftmost value (when the government ownership is 0%) is
5.32 p.p. The size declines to 2.49 p.p. when the government blockholding is 51.7%; then, it
rises up to 5.76 p.p., when there is full government ownership. This suggests a maximum gap
of 3.28 p.p. on the U curve, translated to a difference of US$0.3 million for an acquirer of
US$1 billion total assets. The leftmost point of the curve (fully private) is slightly lower than
the rightmost point (fully state owned), suggesting that fully private MNEs in general in our
sample tend to take on smaller deals than fully SOMNEs. This is consistent with the existing
studies (Buckley et al., 2007; Cui & Jiang, 2009, 2012).
Starting in Model 6, we introduced moderators one by one. We interacted each moderator
with government blockholding and its squared term. We included only home budget balance
risk in Model 6, then only BIT with host in Model 7, and both moderators in Model 8. The
results are highly consistent. Since H2 and H3 concern the moderating effects on the baseline
U relationship, we followed Haans et al. (2016) to convert the regressions results in Model 8
into moderating effects, respectively, on the turning point of the U, as a proxy for relatively
influence, and the curvature of the U, as a proxy for the degrees of conflicts (see online
Supplement 2).
Our results lend support to H2 and H3. The marginal effect of home budget balance risk
is always positive on the turning point (see A7 in Supplement 2) and always negative on the
curvature (see A8 in Supplement 2). Economically, when home budget balance risk increases
(decreases) from the sample’s mean value (0.42) by a standard deviation (1.49), the govern-
ment blockholders would need approximately 6.14% more (less) formal voting rights to
balance out the overall influence of the private blockholders (see A9 in Supplement 2). This
is evidence that soft budget (at a low budget balance risk) is an informal strength for govern-
ment blockholders. Second, the marginal effect of the same increase in home budget balance
risk on the curvature of the U relationship is constant at –2.53 (see A10 in Supplement 2). In
economic terms, this means, for instance, that with a standard deviation increase (decrease)
in home budget balance risk, the manager has to reduce the acquisition size by 2.53 times less
(more) when government-private blockholder conflicts are reaching their peak. This is evi-
dence of more (less) costs for designing more complex governance and incentive mecha-
nisms under a lower (higher) budget balance risk to alleviate the government-private
blockholder conflicts when they are at peak.
The marginal effect of BIT with host is always positive on the turning point (see A11 in
Supplement 2) and always negative on the curvature (see A12 in Supplement 2). Economically,
this means, as compared with those without BITs, to control an acquisition into a host market
with which the home market has a BIT in force, the government blockholders would need
approximately 6.9% more formal voting rights to balance out the overall influence of the
private blockholders (see A13 in Supplement 2). This suggests a weaker government block-
holder when there is a BIT in force, protecting private blockholders with a transparent and
formal legal framework. Second, the marginal effect of BIT with host on the curvature of the
U relationship is constant, –4.58 (see A14 in Supplement 2). In economic terms, this means,
as compared with those without BITs, to proceed with an acquisition into a host market with
which the home market has a BIT in force, the manager has to reduce the acquisition size by
4.58 times less when government-private blockholder conflicts are reaching their peak. This
suggests a lower degree of government-private blockholder conflicts at their peak if two
markets enjoy a BIT inforce.
We simulated the overall moderating effects of home budget balance risk and BIT with
host (Figures 1C and 1D, respectively), assuming that all the other control variables take their
mean values and the context-specific dummies take zeros (Greene, 2012). The simulations
show very similar patterns. The combined effects depend on whether the government block-
holders have a dominant position (about 75% of voting rights). The overall U curve shifts
upward if the government blockholders do not have a control position, caused by an increase
in home budget balance risk or the presence of a BIT, both of which may align motives and
build trust among shareholders in supporting a manager to pursue a large-scale transaction.
However, when the government blockholders are in a controlling position, an increase in the
budget balance risk or the presence of a BIT causes a downward shift of the curve. When the
government is in control (with less contests by the private blockholders), a low budget bal-
ance risk would encourage a state-controlled firm to take on large acquisitions abroad.
Similarly, in the absence of a BIT, a state-controlled acquirer would enjoy unique diplomatic
access that is not available to its private competitors for the same target, leading to advan-
tages in taking on large bids.
Finally, an inverted Mills ratio is generally statistically significant (p < .1), suggesting that
the use of the Heckman selection model was justified as expected (Heckman, 1977).
Robustness Checks
An alternative indicator of PP conflicts underlying a cross-border acquisition is the share-
holder value effect on the acquiring firm, because the stock market performance reflects how
public investors view the quality of corporate governance within a firm and take into account
the costs incurred to address any PP or PA conflicts (Chen & Young, 2010; Renders &
Gaeremynck, 2012). We replicated our main GLM regressions with ordinary least square
regressions using cumulative abnormal returns (CARs) to the acquirer around the date of
announcement as the dependent variable. These estimates use a smaller sample because only
listed acquirers have stock market information for us to calculate CARs information, together
representing 56.46% of our total sample of complete deals. We calculated CARs for all of our
listed acquirers based on a merge between BvD and Compustat datasets. Following prior
studies on cross-border acquisitions (e.g., Aybar & Ficici, 2009), we used the range of 265 to
21 days before the announcement and S&P market return as the baseline and a window of 10
days before to 10 days after the announcement to calculate CAR. The correlation between
CARs and acquisition size is only –0.0107 (p > .1), suggesting that CARs are not a substitut-
ing dependent variable of our main regressions. A low correlation between these two is con-
sistent with prior studies on cross-border acquisitions (Aybar & Ficici, 2009; Moeller et al.,
2005), which suggests that value creation and loss can be attributed to a large deal size.
Reported in Table S1 (online), results are consistent for the main U-shaped relationships,
with different event and baseline windows with our main findings with two exceptions.
However, neither of the moderators had any statistically significant effects on the U shape.
These findings suggest that public investors are sensitive to the private-government block-
holder structure, whereas, unlike managers, they are not affected by home budget balance
risks or BIT presence.
In an additional robustness check, we recognized that national budget risks may not be
uniform across all industries. As a robustness test, we separated the sample of strategic indus-
tries (energy, utilities, defense) from nonstrategic industries. We included such industries as
oil and gas extraction (SIC code 13); electric, gas, and sanitary services (SIC code 49); and
guided missiles and space vehicles/parts (SIC code 376), which represent about 3.86% of our
total sample. As reported in Table S2 (online), while the main results and budget moderators
still hold in the nonstrategic industries, the results show that strategic industries are less
responsive to national budget risk (statistically). This is expected because national budget
risk is more likely to lead to budget cuts in nonstrategic industries than strategic industries.
We suggest that future research examine disaggregated budget measures to figure out the
causes of these results.
Next, we replicated our model using two alternative measures for the voting power bal-
ance between the two groups of blockholders. The first is on the bargaining power of the
government blockholder relative to the private counterparts. We created a new measure for
relative power of either blockholder group, calculated as follows: | (government % – private
%) / total voting rights by all blockholders |.
This measures the relative power of either blockholder group in comparison to the other.
Here we have to drop observations whose total voting rights by all blockholders were zeros,
meaning that there was no blockholder (>5%) in these acquirers. In total, we dropped 2,089
transactions. As presented in Table S3 (online), findings remain consistent with our main
U-shaped hypothesis. That is, the larger the gap between the two blockholder groups, the
more likely an acquirer is scaling a deal. However, neither moderating effect was supported.
We reason that the moderating effects are nonlinear and asymmetric, as found in the main
results.
The second is on the potential alliance (or the lack of it) among private blockholders. To
control for whether private blockholders are concentrated (or aligned) into a small number of
powerful blockholders or a large number of small blockholders, we went back to the original
data on shareholder structures. From there, we calculated the relative power of the largest
private blockholder as a percentage among all private blockholders. This new variable is
denoted concentration of private blockholders. For instance, if the total percentage of voting
rights of all private blockholders is 50% and the largest private blockholder has 25%, then the
concentration of private blockholders is 50% (i.e., 25% / 50%), suggesting that half of the
private blockholders are aligned into a single largest shareholder. We used this as a moderator
on our main tests. As reported in Table S4 (online), the U-shaped relationship between deal
size and government blockholding is more salient when the private blockholder group is
more concentrated. These findings suggest that government-private blockholder PP conflicts
are more salient when private blockholders are more aligned into a single holder. This is
consistent with our arguments and with agency theory in general.
Also, due to data limitation, we did not directly examine any managerial and governance
arrangements reflecting the intervention of the government as a blockholder. Instead, we
tested three more proxies of national institutions that suggest a government’s ability in inter-
vening in business: employee protection of the home market from the Organisation for
Economic Co-operation and Development database, business regulations score from the
Fraser Institute, and home market state capitalism score (calculated in the same way as the
host market measure) from the Fraser Institute. These three proxies correspond to a govern-
ment’s intervention in labor/employment practices, business policies, and markets. We tested
whether and how these three proxies moderate our findings regarding the inverted U-shaped
relationship between government blockholding and acquisition size. Results show statisti-
cally significant effects for the first two proxies (see Table S5 online). First, employee pro-
tection flattens the U-shaped curve, suggesting less salient PP conflicts in general. This is
likely a result of employees acting as internal monitors of acquisition behaviors and ensuring
that the blockholder motivations for each decision are transparent. Second, business regula-
tion aggravates the U shape, suggesting that the government-private PP conflicts may be
more salient in highly regulated countries. This lends some support to the idea that a govern-
ment’s ability in regulating (a particular form of intervening in) the markets is a source of PP
conflicts.
Discussion
The existing PA or PP literature would suggest that MNEs pursue risks in cross-border
acquisitions to advance their controlling shareholder’s private benefits of control or, under
diffused ownership, the manager’s own self-interests or hubris. We argue that this literature
overlooked the diversity of shareholder interests when there are multiple large private and
government shareholders. While the extant PA and PP perspectives have suggested the het-
erogeneity of shareholder interests, they focus their attention on the conflict between the
controlling shareholder’s private benefits of control, on one side, and the minority sharehold-
ers’ interest in shareholder value, on the other. Their arguments are implicitly grounded in a
strong assumption that different shareholders conflict with one another individually and thus
do not depict a complete view in the case of government-private blockholder conflicts under-
lying hybrid SOMNEs as an influential and underexplored force in global investments.
Such blockholder conflicts are caused by the fundamental goal conflicts between large
blockholder groups (government vs. private) rather than by the conflicts of interests between
controlling and minority shareholders, which we empirically controlled for via ownership
concentration but found a smaller explanatory power. Such conflicts affect not only the
shareholder interests the manager represents but also the traditional PA problem through the
changing degrees of shareholder monitoring and intervention.
Our theory and findings provide a new perspective within the agency theory of MNEs.
First, we suggest that the agency problem lies in the relationship, not only between the prin-
cipals and the agent or between the controlling and the minority principals, but also among
controlling principals (i.e., blockholders). Essentially, powerful blockholders actively moni-
tor the agent to ensure their own interests against other blockholders, creating a problem of
some powerful blockholders misrepresenting the others in their PA relationship. Second,
while the current literature has well documented the heterogeneity of preferences and behav-
iors of different blockholder identities, our study revealed the consequences when two types
of conflicting blockholders coexist, as well as how such consequences vary when their rela-
tive voting power against each other changes. Last, we suggest that the consequences of PP
conflicts may depend on the institutional contexts, which may moderate the informal influ-
ence either type can exercise. In our study, a government blockholder’s dual influence can be
strengthened under a stronger home budget balance and the absence of a BIT between the
home and the host markets.
Our study also contributes to the international business studies on MNE strategies. We
broaden this literature that is solely firm based to a diverse conceptualization of interests
among influential blockholders. For instance, Buckley and Strange (2011: 466) suggested
that the MNEs’ risk preference should reflect “the various stakeholders’ risk preferences.”
Filatotchev and Wright (2011) also called for an agency perspective to understand the con-
flicts between principals of MNEs. In a recent special issue entitled “Government as Owners:
Globalizing State-Owned Enterprises” by the Journal of International Business Studies, all
articles tended to assume a firm-specific behavior while overlooking the internal conflicts
among owners. Our theory and findings suggest a deeper examination of a nonlinear relation-
ship between government ownership (or involvement in general) and international acquisi-
tions, based on the involvement of the private owners.
Our study also sheds light on the institution-based view of strategy (Peng, Sun, Pinkham,
& Chen, 2009; Peng, Wang, & Jiang, 2008). Our theory and findings reveal a mechanism
through which home and host institutional environments affect MNE strategies. Specifically,
home and host institutions may moderate the salience of blockholder PP conflicts. When they
align shareholder conflicts, it is more likely for the MNE manager to pursue risky expansion
projects. When they aggravate shareholder conflicts, the MNE manager may have to forgo
investment opportunities. We thus suggest that future studies on strategy take into account
this interaction between institutional environments and the internal conflicts (or alignment)
among key decision makers such as the influential blockholders.
Limitations and Future Directions

Altogether, we seek to open a new scholarly conversation on three issues concerning the
governance of MNEs and their strategic behaviors. First, the literature should integrate extant
discussions on the traditional PA and PP problems into potential blockholder contests because
of diverse goals among the large owners (i.e., a large blockholder PP perspective). Second,
studies should take into account the potential coalitions among these large owners because of
their shared identities and objectives (i.e., PP rather than principal-principal). Third, the
influence of such private-government PP problems depends on the institutional contexts in

the home and host countries through two mechanisms: their effects on the relative influence
between large shareholder groups and their effects on the degree of goal conflicts (or
alignment).
Our article is not without limitations, which deserve attention in future studies. First, our
divide between the government and private blockholders needs to be further developed.
Although it is widely accepted that private and government interests have fundamental dis-
tinctions of themselves, recent studies suggested the diversity within private interests and
with government owners. We tested the potential heterogeneity between family/individual
and institutional shareholders in our sample and found consistent results. A further investiga-
tion may be to distinguish foreign institutional investors from domestic institutions, since a
few studies found that foreign ownership is associated with stronger financial and market
logic, especially given that foreign investors come from a strong shareholder value-oriented
regime (Desender, Aguilera, Lópezpuertas-Lamy, & Crespi, 2016; Geng, Yoshikawa, &
Colpan, 2016). Our data, however, do not provide sufficient information to identify whether
an institutional investor is foreign or domestic. Similarly, there is a variety of government
interests. For instance, M. H. Li, Cui, and Lu (2014) argue that investors affiliated with local
governments are less pressured to serve national public and political interests and enjoy
greater managerial autonomy and market orientation, as compared with those affiliated with
the central government. We suggest future extensions of our efforts to offer a more nuanced
examination into the potential alignment and coalition between some private and govern-
ment shareholders.
Second, due to data limitation, we did not directly test the governance mechanisms at the
firm level that might moderate the blockholder PP conflicts. Therefore, a possible extension
is to directly examine the role of agents and corporate governance arrangements within this
framework. As argued, an important source of the goal conflicts between private and govern-
ment blockholders is their different preferences in corporate governance arrangements, such
as board of director structures, the market intervention behaviors of the government, and
public policies regarding debt versus equity in foreign transactions, agency-monitoring
mechanisms (behavior vs. performance-based monitoring), and incentives. In this article, we
follow the prior literature suggesting that the state identity of blockholding is positively cor-
related with the control influence in the top management team, including the executives and
the board of the directors (Boubakri et al., 2008). However, we suggest that it is valuable to
have a more fine-grained investigation into the principals-agent relationship by showing dif-
ferent ties between principals and the agent (e.g., political/social groups such as labor union
representatives on board, board independence, CEO/board ties with the shareholders, and
CEO/board compensation and incentive packages). We suggest that future studies examine
the potential conflicts in setting up these arrangements, as a more direct cause for a firm’s
strategic decisions.
Last, while our study is cross-national, many country-specific institutions that might
affect government activities are not controlled for. We suggest that government activities are
highly related to a home nation’s political institutional contexts. Therefore, we suggest that it
is valuable to explore a more comprehensive set of institutional dimensions as potential mod-
erators of the government-private PP conflicts. In terms of soft budget advantages, we sug-
gest as relevant measures such institutions as public policies regarding finance through debt
or equity, approval processes for outward FDI, information provision by government agen-
cies, and ties to key state-owned financing agencies on the board of directors. Related to
diplomatic channels, future studies can also examine diplomatic visits among MNEs and
governments and diplomatic experiences of directors on board.
Conclusion
With these ideas we see growing opportunities to focus on the conflicts of large sharehold-
ers and potential alignments of these shareholders by similar preferences and interests and to
investigate how such conflicts and alignments are shaping a firm’s overall preferences and
behaviors. With a more nuanced understanding of the ownership structures of SOMNEs, we
also call for a rhetoric shift from Leviathans to hybrid Leviathans in the strategy studies.
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A Principals-Principals Perspective of Hybrid PDF

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A Principals-Principals Perspective of Hybrid

We propose a private-government principals-principals approach to understand corporate gov-

Keywords: agency theory; state-owned enterprise; multinational enterprise; cross-border

Recent work on corporate governance highlights new avenues of research, expanding

decision of SOMNEs (Cuervo-Cazurra, Inkpen, Musacchio, & Ramaswamy, 2014: 934),

As empirically evidenced by the multiple-blockholder conflict literature (Attig et al.,

Institutional Contexts of the Home State’s Dual Influence

Français Dans Le Domaine de L’économie Internationale, International Country Risk Guide

Variables and Measures

Independent and Moderating Variables

where Φ ( ⋅) is a cumulative distribution function of the standard normal distribution.

Deals with a government Government

aPercentage based on all deals from this market.

Probit on completion GLM on acquisition size

Gov blockholding −0.07 −3.82* −0.52* −2.67* −2.79* −3.02* −3.13*

Limitations and Future Directions

influence of such private-government PP problems depends on the institutional contexts in

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