The effect of cultural distance on cross-border

M&A performance by emerging market firms -

A multiple measurement analysis

Master’s Thesis 30 credits

Programme: Master’s Programme in
Accounting and Financial Management
and Master’s Programme in Business
and Management
Specialisation: Financial Accounting and
International Business

Department of Business Studies

Uppsala University
Spring Semester of 2021
Date of Submission: 2021-06-02

Christoffer Chami
Erik-Axel Vinterskog
Supervisor: Christine
Holmström Lind
Abstract
This thesis examines how cultural distance affects cross-border M&A performance of emerging
market firms. The study adds to the previous literature by using a multi-measurement approach,
a broader sample of emerging countries and by comparing the effects to those of developed
market firms. Performance is divided into short-term performance, measured as cumulative
abnormal return (CAR) and long-term performance, measured as sales growth and change in
Return on Sales after the transaction (sales CAGR and change in ROS). Using a sample
of transactions conducted by both emerging market firms and developed market firms during
the years 1997-2019, this study finds that cultural distance has a negative effect on the long-
term cross-border M&A performance of emerging market firms. However, no significant effect
is found on the short-term CAR following a cross-border M&A by emerging market firms.
Additionally, none of the included performance measures is affected by cultural distance on a
statistically significant level following a cross-border M&A by developed market firms. The
results hence indicate that the effect of cultural distance is greater for emerging market firms
than developed market firms when engaging in cross-border M&As.

Keywords: Cross-border M&A, Emerging markets, Cultural distance, Cross-border M&A

Performance
1 Introduction ................................................................................................................................................................. 3
1.1 Purpose ................................................................................................................................................................. 6
1.2 Research questions ................................................................................................................................................ 6

2 Theory and hypothesis development.......................................................................................................................... 7

2.1 Cross-border M&A................................................................................................................................................ 7
2.2 Cultural distance ................................................................................................................................................... 9
2.3 The effect of cultural distance on cross-border M&A performance .................................................................... 10
2.4 Cultural distance and cross-border M&A performance of emerging market firms............................................. 12

3 Method ....................................................................................................................................................................... 16
3.1 Data collection .................................................................................................................................................... 16
3.2 Sample ................................................................................................................................................................. 16
3.3 Research design................................................................................................................................................... 18
3.4 Dependent variables ............................................................................................................................................ 18
3.4.1 Short-term performance............................................................................................................................... 19
3.4.1.1 Calculating CAR ................................................................................................................................. 21
3.4.2 Long-term performance ............................................................................................................................... 23
3.5 Independent variables ......................................................................................................................................... 24
3.5.1 Cultural distance .......................................................................................................................................... 24
3.6 Control variables................................................................................................................................................. 25
3.7 Final Models (short-term and long-term-performance) ...................................................................................... 27
3.8 Statistical control ................................................................................................................................................ 29
3.9 Reliability and validity ........................................................................................................................................ 30
3.10 Robustness test .................................................................................................................................................. 31
3.11 Limitations of the method .................................................................................................................................. 31

4 Results ........................................................................................................................................................................ 33
4.1 Descriptive .......................................................................................................................................................... 33
4.2 Correlations ........................................................................................................................................................ 34
4.3 Regression ........................................................................................................................................................... 37
4.3.1 Abnormal returns......................................................................................................................................... 37
4.3.2 Regression results ........................................................................................................................................ 37

5 Analysis ...................................................................................................................................................................... 40
5.1 Analysis of findings ............................................................................................................................................. 40
5.2 Robustness test .................................................................................................................................................... 43

6 Discussion................................................................................................................................................................... 45
6.1 Complexity of cultural distance and performance............................................................................................... 46

7 Conclusion.................................................................................................................................................................. 47
7.1 Concluding remarks ............................................................................................................................................ 47
7.2 Limitations and future research .......................................................................................................................... 48

References ..................................................................................................................................................................... 50

Appendix ....................................................................................................................................................................... 60

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1 Introduction
Cross-border Mergers & Acquisitions (M&A) have become increasingly common and global
M&A activity has increased both in terms of number of deals as well as in total deal value
(IMAA, 2020). Over the last ten years, the annual value of global cross-border M&As increased
by approximately 70% (UNCTAD, 2020) and currently makes up around 40% of total M&A
activity (Bloomberg, 2020). A key driver of this cross-border M&A growth is the increased
participation by emerging market firms, which according to UNCTAD accounted for 28% of
the global M&A value in 2017. There are both strategic and financial reasons why a company
may choose to expand abroad, but the main motive is ultimately the same with all M&As,
namely to create synergies and enhance performance (Root, 1994). By using cross-border M&A
to enter a new geographical market, it allows for the acquirer to tap into the local knowledge of
the acquired firm and to acquire new capabilities from the target (Lamont and Reus, 2009,
Chakrabarti, Gupta-Mukherjee, Jayaraman, 2009). Firms with strong competitive advantages
may also expand internationally in order to take advantage of their existing capabilities in new
markets (Li, Li and Wang, 2016). Regardless of the motive, to fully benefit from cross-border
M&As and ultimately increase performance, the companies need to successfully integrate the
different organizations, which is associated with various challenges (Lamont and Reus, 2009;
Stahl and Voigt, 2008).

One major factor affecting post-M&A performance is the cultural distance between the acquirer
and target. People are shaped by different cultures, values, norms and beliefs which affect how
individuals interact and behave (Hofstede, 2010, p.6). A wide range of literature have
documented the effects of cultural distance on cross border M&A performance, however,
previous research within the field is inconclusive. One strain of literature argue that cultural
distance can be a source of value creation for shareholders and increase performance (Morsini,
Shane and Singh, 1998; Page, 2008; Chakrabarti, Gupta-Mukherjee and Jayaraman, 2009).
Others argue that cultural distance leads to declined performance and destroys shareholder
value (Datta och Puia, 1995; Chatterjee et al. 1992; Li, Li and Wang, 2016; Boateng et al.,
2019).

Reus and Lamont (2009) pursue a more nuanced approach and argue that cultural distance is a
double-edged sword that may complicate the integration which has a negative effect on M&A
performance. However, if the companies manage to successfully integrate the two units, there

3
are more opportunities for learning between culturally diverse counterparts than those who are
culturally similar, which ultimately may increase M&A performance. Therefore, how well the
firms manage to integrate the companies should have a direct effect on post-M&A
performance.

Although there is extensive literature on cultural distance and cross-border M&A performance,
most of the studies have been conducted on cross-border M&As from developed markets while
only a small fraction of studies has examined cross-border M&As from emerging markets
(Lebedev et al., 2014; Rottig, 2017). Simultaneously, emerging markets have been politically
liberalised in recent decades which have enabled these firms to become more outward looking
and to a greater extent engaged in foreign investments (Narula & Dunning, 2000). This has led
to a rapid increase in cross-border M&As from emerging market firms, mainly motivated by
the acquisition of new strategic resources and knowledge (Luo and Tung, 2007).

The strategic asset motive differs from that of firms from developed markets which are mainly
motivated by the exploitation of existing assets in new markets (Luo and Tung, 2007; Li, Li
and Wang, 2016). With the acquisitions, emerging markets usually seek reverse knowledge
transfer which requires significant learning and absorption capabilities. However, emerging
market firms in general lack the same international experience as firms in developed countries
as they have not previously engaged in cross-border M&As to the same extent. This means that
they generally do not have the same extensive knowledge base to rely on when engaging in
cross-border M&As (Li, Li and Wang, 2016). Due to their asset seeking motives, the integration
of the two cultures may be of greater importance while their lack of international experience
simultaneously might imply even more challenges (Li, Li and Wang, 2016; Malhotra,
Sivakumar and Zhu, 2011).

Because of differences in cultural contexts, motives and experience between developed and
emerging market firms, the previous findings on cross-border M&A performance may not be
representative for acquirers based in emerging markets (Gubbi et al, 2010; Rottig and Reus,
2018). Similar to the studies on cultural distance and M&A performance in developed markets,
the limited studies that have been done on emerging markets also show different results in terms
of the effects on cross-border M&A performance. Some studies have concluded that cultural
distance leads to negative effects on cross-border M&A performance in emerging markets (Li,
Li and Wang, 2016; Boateng et al., 2019). While others find that cultural distance has a positive

4
impact on cross-border M&As conducted by emerging market firms (Aybar and Ficici, 2009).
Given the growth in cross-border M&As involving emerging markets and the limited
knowledge about this field, further research within the area is motivated.

In addition to covering a previously understudied research area, the contribution of this thesis
to the literature is threefold. Firstly, existing literature that examines cultural distance and cross-
border M&A performance in an emerging market context, have mainly focused on short-term
performance measured as abnormal returns after the announcement of the M&A (Li, Li and
Wang, 2016; Boateng et al., 2019). However, the market tends to overreact to news about
M&As which can lead to overvaluing cross-border M&As in the short-term (De Bondt and
Thaler, 1985). Furthermore, since M&A is a process over time, there may be a need for a more
multidimensional measure for cross-border M&A performance (Jemison and Sitkin 1986;
Meglio and Risberg, 2011). This is especially true for emerging markets firms since they are
usually motivated to engage in cross-border M&As to acquire strategic resources and absorb
knowledge (Luo and Tung, 2007). Thus, to capture the full effects of such acquisitions, short-
term abnormal returns may not be sufficient (Colman & Lunan, 2011; Zollo & Meier, 2008;
Schoenberg, 2006). There is therefore a need to also include a more long-term perspective in
order to better capture the full effects of the culture differences on cross-border M&A
performance by emerging market firms.

Long-term performance can, in line with previous literature, be measured with the accounting-
based measures profitability and sales growth (Fernhaber and Li, 2010; Zhou and Wu, 2014).
This hence adds another perspective to performance in this study as these measures aim to
capture operational effects while abnormal returns study the market’s expectations (Stahl and
Voigt, 2008). Furthermore, Schoenberg (2006) argues that one type of financial measurement
is not adequate to capture complex affairs like cross-border M&A performance. By using both
market-based measures and accounting-based measures, this study may provide new insights
on how cultural distance affects emerging market acquirers’ performance over time. Secondly,
most of the studies on cross-border M&A performance in an emerging market context usually
focus on a single country which may limit the possibility to generalise the results for other
emerging markets (Deng and Yang, 2015). Thus, following the call of Weber, Tarba and Rottig
(2018) and Deng and Yang (2015) a large- scale sample consisting of firms from the 23
emerging markets that are included in the MSCI emerging markets index are used in this study.
Thirdly, to gain a deeper understanding of how emerging market firms differ from developed

5
market firms in this context, a sample from developed market firms was sourced. This group
will be used for comparison in order to gain further insights of how cultural distance affects
emerging market firms and if the effect is different from that of developed market firms. To our
knowledge, there is only a limited amount of studies that take this comparative approach.

As for practical relevance this study provides an increased understanding on how cultural
distance may affect cross-border M&A performance, which could be of interest for numerous
stakeholders engaged with emerging market firms. By providing insights on cultural distance’s
impact on both market-based performance (abnormal returns) and accounting-based
performance (change in profitability and sales growth) this thesis could be of strategic
importance in the cross-border M&A context.

1.1 Purpose

This thesis will explore the effect of cultural distance on post-M&A performance for acquirers
based in emerging markets. Additionally, the study will compare the effect of cultural distance
on cross-border M&A performance between emerging- and developed market firms in order to
identify potential differences which could provide an increased understanding of emerging
market firms in this context. The study aims to complement the previous rather limited research
in the area by examining both the short-term market-based performance measured as abnormal
returns and long-term accounting-based performance measured as change in profitability and
sales growth after the M&A. Using both market-based and accounting-based measures, this
thesis aims to provide new insights and lead to an increased understanding regarding the effect
cultural distance has on cross-border M&A performance for emerging market firms.

1.2 Research questions

Research question 1: How does cultural distance affect long-term and short-term cross-border
M&A performance for emerging markets firms?

Research question 2: How does the effect of cultural distance on cross-border M&A
performance differ between emerging market firms and developed market firms?

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2 Theory and hypothesis development
2.1 Cross-border M&A
Cross-border M&A refers to M&As where the target and acquirer are based in different
countries, and is a commonly used entry mode when expanding to foreign markets.
Consequently, as the world becomes more internationalised, cross-border transactions have
increased significantly and currently make up nearly 40% of total global M&A activity
(Bloomberg, 2020).

Previous studies find that there are a number of motives behind cross-border M&As. A
dominant theory describing the motives for cross-border M&As is the resource seeking
perspective which considers the acquisition of resources and capabilities as the main motivator
for acquiring a company in a foreign market (Glaister & Ahammad, 2010; Dunning, 1998). By
acquiring a company, it allows the acquirer to tap into new knowledge and to obtain strategic
resources such as innovative capabilities, management skills, patents and technology from the
acquisition. Integrating these resources and being able to combine both of the firm's knowledge
and capabilities may lead to enhanced competitive advantage (Lamont and Reus, 2009).

In contrast to resource seeking motives, the asset exploitation view describes that firms with
strong competitive advantages in their home markets may seek to expand internationally in
order to exploit their existing capabilities and advantages in new markets such as superior
products, skills or technology (Li, Li and Wang, 2016; Makino et al., 2002; Yiu, Lau, & Bruton,
2007). Exploiting superior products in new markets could lead to a larger market share and
increased sales. Furthermore, selling more products offers the potential for economies of scale
which would lower the contribution margin and ultimately increase profitability (Markides and
Ittner, 1994). By exploiting existing advantages, a firm may also increase their market power
which enhances their pricing power as well as bargaining power with suppliers, meaning that
firms can increase their profit margin (Kim and Singal, 1993). This is mainly achieved by
acquiring competitors, a firm in a similar industry or in the same value chain (Hitt et al., 2001).

Other common motives that have been emphasised include diversification and achieving
synergies between the companies (Markides & Ittner, 1994). Additionally, Datta & Puia (1995)
describes how cross-border M&As enables fast entry and direct access to the foreign market.

7
Hence, acquiring a local established firm will provide quicker access to the desired market than
by entering through a greenfield investment. This is also confirmed by Shimizu et al. (2004),
which can further explain the popularity of cross-border M&As. However, cross-border M&As
are associated with integration challenges that can affect the acquirers’ ability to achieve their
performance enhancing objectives. Firms engaging in cross-border M&As also face challenges
such as the liability of foreignness (Zaheer and Mosakowski, 1997). Liability of foreignness
means that these firms will encounter additional costs associated with operating in a foreign
market as a result of lacking knowledge about the local environment (Forsgren, 2017, p.16).
This mix of opportunities and challenges are evident in the cross-border M&A literature which
presents inconclusive findings on whether or not cross-border M&As increases performance.

Numerous studies that have measured acquirers' short-term performance by looking at

abnormal stock returns, have found that cross-border M&As lead to enhanced performance
(Markides and Ittner, 1994; Gleason, Gregory and Wiggins 2002; Gubbi et al., 2010; Bhagat,
Malhotra and Zhu, 2011). On the other hand, also looking at abnormal returns Datta and Puia
(1995) showed that acquirers experienced negative performance after a cross-border M&A.
Furthermore, the studies examining the performance effect with accounting-based measures
also show contradicting results. Ghosh (2001) found that performance was unchanged
following an acquisition while Heron and Lie (2002) and Powell and Stark (2005) showed an
increased performance after the acquisition. Dickerson et al. (1997) found that performance
decreased.

The inconclusive results demonstrate the complex nature of cross-border M&As and show that
there are numerous factors affecting performance, including the post-integration process which
have been frequently discussed in the previous literature. In order to achieve positive
performance, the firms must succeed to integrate the businesses as it otherwise can pose
challenges to achieve the intended performance enhancing objectives (Li, Li and Wang, 2016;
Reus and Lamont, 2009; Stahl and Voight, 2008). Therefore, differences in culture between the
countries are often discussed in this context as it has an impact on how well the firms manage
to integrate with each other and hence affects the performance of the acquisition (Li, Li and
Wang, 2016).

8
2.2 Cultural distance
Culture is described as unwritten rules of the social game and can be defined as the collective
programming of the mind that distinguishes the members of one group or category from others
(Hofstede, Hofstede and Minkov, p. 6, 2010). Thus, cultural distance is the measure of
differences in values between cultural groups. There are several frameworks that classify
culture into different dimensions, most notable are Hofstede’s national culture dimensions.
These are:

(i) Power distance which is defined by the extent less powerful members of a group are willing
to accept power to be distributed unequally. In an environment characterised by a low level of
power distance subordinates are likely to expect superiors to consult them on different matters
and may also contradict their superiors. While in environments with high power distance
subordinates are highly dependent on superiors to make the decisions and are expected to follow
orders without question (Hofstede, Hofstede and Minkov, 2010, p. 60-61).

(ii) Individualism is defined by the extent that members of a group identify themselves as
autonomous individuals rather than interdependent members of the group. In an individualistic
environment everyone is expected to care for themselves and their closest family while in a
collectivistic environment (or an environment with low individualism) individuals value a
strong sense of belonging to a larger group or organisation where collective needs are valued
more than individual ones (Hofstede, Hofstede and Minkov, 2010, p. 91-92).

(iii) Uncertainty avoidance, refers to how individuals or societies deal with ambiguity. Societies
scoring high in this dimension usually prefer clear guidelines, rules and laws to reduce
ambiguity (Hofstede, Hofstede and Minkov, 2010, p. 191).

(iv) Masculinity is defined by what extent an individual values factors such as assertiveness,
ambition, competition and materialism and wealth. While the counterpart femininity in general
values cooperation, high quality of life and security (Hofstede, Hofstede and Minkov, 2010,
p.139).

Hofstede’s dimensions indicate how individuals from different national cultures behave and
interact (Hofstede, Hofstede and Minkov, 2010. p.302). Previous literature also shows that

9
national culture has a significant impact on other strains of culture, in particular corporate
culture (Schneider and Meyer, 1991). Hofstede, Hofstede and Minkov (2010, p.302-303) argues
that national culture is a key factor in explaining corporate behaviour. The level of power
distance may for example affect how firms organize themselves while the level of individualism
may affect how employees cooperate. Therefore, even though Hofstede’s dimensions primarily
focus on national culture it is considered a relevant measurement in the cross-border M&A
literature, which could explain the frequent use of the dimensions in previous studies (Boateng
et. al, 2019; Nicholson & Salaber, 2013; Deng & Yang, 2015).

2.3 The effect of cultural distance on cross-border M&A

performance
Researchers have argued that differences in Hofstede's national culture dimensions can lead to
complications if not managed effectively (Li, Li and Wang, 2016; Ahern et al., 2015). In the
context of cross-border M&A, cultural distance is therefore a central issue since management
is faced with the challenge of integrating both organisational and national cultures, from which
the former is influenced be the latter (Chakrabarti, Gupta-Mukherjee, Jayaraman, 2009;
Schneider and Meyer, 1991). Cultural distance has been found to complicate post-M&A
integration and is one of the key factors in M&A failure (Malhotra, Sivakumar and Zhu, 2011).
The authors highlight that nearly 50% of all failed M&A are due to difficulties of integrating
different cultures. In line with this finding, the negative effects of cultural distance on cross-
border M&A performance finds support in a strain of literature (Chatterjee et al. 1992; Datta
and Puia, 1995; Li, Li and Wang 2016; Salaber and Nicholson, 2013; Boateng, 2019). The
negative effect of cultural distance on performance is mainly explained through the integration
challenges that come with vast cultural differences. Integration challenges may hinder synergy
realisation since synergies are heavily dependent on coordination between the employees of the
two firms (Ahern et al., 2015). Cultural distance can therefore increase the integration cost
following an acquisition, thereby having a negative impact on the post-M&A performance.
Most notably, scholars have discussed the effects on knowledge exchange and inter-firm
cooperation (Hofstede, 2010, Li, Li and Wang, 2016).

Lamont and Reus (2009) highlight the importance of understanding different local capabilities,
such as marketing, management and innovative skills, and how to combine these post-M&A in
order to create competitive advantages. The authors argue that cultural distance impedes

10
understanding between the firms since companies are less knowledgeable about more distant
cultures from which the local capabilities and routines originate. Lacking an understanding of
the local culture and practices in which knowledge is embedded hinders the ability to even
identify the benefits of local knowledge. In turn, failing to understand how certain knowledge
may be beneficial makes it difficult to apply the knowledge and realise knowledge exchange,
ultimately making the integration between the firms more challenging and affecting
performance negatively (Dikova and Sahib, 2013; Li, Li and Wang, 2016).

Lack of effective communication in the combined entity has also been found to complicate the
integration process. In a study from DeLong and Fahey (2000) managers emphasise problems
stemming from a lack of communication due to cultural differences as a reason for several key
issues within the business. Lack of communication may lead to information problems and
employees misunderstanding assignments, thus not only affecting knowledge exchange but
reasonably also the daily operational effectiveness (Li, Li and Wang, 2016).

Cultural distance may also affect group dynamics and employee retention. Previous literature
has shown that people from distant cultures are less inclined to build trustful and consistent
relationships (Doney, Cannon and Mullen 1998; Luo, 2001). This may create barriers between
groups, as reported by Lamont and Reus (2009), who argue that cultural differences may
polarize groups and create an “us against them” atmosphere. While this affects employees'
willingness to share information and ideas between the groups, it can also create a hostile
environment where none of the groups are willing to adapt (Elsass and Veiga, 1994; Hofstede,
2001). Research has highlighted that employees are less inclined to stay in an organization
where the values and norms do not align with their own (Lamont and Reus, 2009; Lubatkin et
al., 1999). Thus, if the key employees possess critical knowledge or play an important role in
the organization, this will most likely affect the cross-border M&A performance (Cannella and
Hambrick, 1993; Ahammad et al., 2016).

While a lot of research shows that cultural distance has a negative effect on M&A performance
there are also authors who argue that cultural distance may be a source of enrichment and
enhance M&A performance. This view often emphasises that firms have unique capabilities
and routines that are influenced by the different national cultures. Therefore, cross-border
M&As enables companies to tap into local know-how and best practices creating combinations
of routines that could potentially enable enhanced performance (Morsini, Shane and Singh,

11
1998). This view is supported by Chakrabarti, Gupta-Mukherjee, Jayaraman (2009) who finds
that cultural distance enhances cross-border M&A performance and argues that it is because
cultural distant acquisitions offer a new set of unique capabilities that can be combined in order
to create competitive advantages. Barkema and Vermeulen (2001) also highlights that culturally
distant acquisitions may increase learning and breaking rigidities in the acquiring firm which
reasonably could enhance the long-term performance. This is further emphasised by Lamont
and Reus (2009) who argue that performance may increase in line with a more dispersed culture
because there are more possibilities for new combinations of capabilities and learning
opportunities than in similar cultures. However, they emphasise that for a company to achieve
these combined capabilities and learning opportunities, solid integration capabilities are
required.

Most of the research about cultural distance and cross-border M&A focus on the post-M&A
phase, however, there is also an indirect relationship between cultural distance and performance
through the pre-deal phase. With managers being aware of the potential difficulties following
cultural differences and therefore performing more extensive due diligence and only entering
markets where the economic potential is substantial (Chakrabarti, Gupta-Mukherjee,
Jayaraman, 2009).

Others find that cultural distance has no significant effect on cross-border M&A performance
(Ahammad et al., 2016; Markides and Ittner, 1994; Barkema, Bell and Pennings, 1996).
Furthermore, in a meta-analysis by Stahl and Voight (2008) on developed market firms, the
results indicate that only weak effects on cross-border M&A may be derived from cultural
distance and that the findings are inconsistent depending on measurement, sample and a range
of different factors.

2.4 Cultural distance and cross-border M&A performance of

emerging market firms
There are reasons to believe that the inconsistent findings on how cultural distance affects cross-
border M&A performance are due to contextual differences (Li, Li and Wang, 2016). As
previously highlighted most of the studies have been conducted on developed market firms.
However, emerging market firms and developed market firms differ in two central aspects that
may affect the relationship between cultural distance and cross-border M&A performance,

12
namely their motives for cross-border M&A and their previous cross-border M&A experience
(Luo and Tung, 2007; Li, Li and Wang; 2016; Salaber and Nicholson, 2013).

Developed market firms usually engage in cross-border M&A to exploit an existing competitive
advantage such as superior technology or know-how. Emerging market firms on the other hand,
seek to acquire strategic resources such as technology or managerial capabilities in order to
create a competitive advantage and mediate their latecomer disadvantage (Luo and Tung, 2007;
Nicholson and Salaber, 2013). This is in line with the reasoning by Bertrand and Betschinger
(2012) that emerging market firms focus on improving their business and profitability instead
of solely expanding their geographical presence when engaging in cross-border M&A.
Emerging market firms motives are influenced by a contextual background where such strategic
assets are scarce and the general innovative environment is less developed than those of
developed markets (Li, Li and Wang, 2016; Luo and Tung, 2007). Furthermore, market
constraints such as poor intellectual rights property protection and unsophisticated
infrastructure hinders the continuous internal development of such resources (Luo and Tung,
2007). These constraints on their home-market can therefore be overcome by
internationalisation and establishment in foreign countries (Buckley, Forsans, & Munjal, 2012;
Deng, 2009; Luo & Tung, 2007).

While some of these resources are more easily tradable such as patents and licenses, most of
the desired resources, such as innovation capacity and know-hows are firm-specific capabilities.
These types of resources are embedded in the employees and host country of the firm and thus
more difficult to transfer (Li, Li and Wang, 2016). Strategic resource acquisition creates an
additional dimension of complexity in knowledge transfer. As stated by Li, Li and Wang
(2016), while resource exploitation involves transfer of existing knowledge, resource
acquisition involves transfer of new knowledge. The authors further describe firms that exploit
existing knowledge as teachers while firms acquiring strategic resources take the role of a
student. Following this reasoning, it is therefore fair to assume that integrating knowledge and
capabilities is more challenging when acquiring strategic resources rather than exploiting
existing ones.

Integration of the two firms, and especially the human capital, is critical in order to accomplish
knowledge exchange after a M&A (Ahammad et al., 2016). As previously discussed, cultural
distance may lead to mistrust between employees, complicate communication and hinder

13
employee retention, which ultimately complicate the integration and knowledge exchange
(Lamont and Reus, 2009; Ahammad et al., 2016; Elsass and Veiga, 1994). Thus, it is critical
for emerging market firms to overcome the potential barriers that cultural distance pose in order
to achieve enhanced performance following the M&A.

Previous experience may mediate the challenges related to integration and cultural distance.
Meschi & Metais (2006) finds that previous experience from M&As plays an important role in
the success of new M&As as they can rely on previously obtained knowledge. Companies that
have previously engaged in many cross-border M&As may have internal structures and
developed routines regarding how to operate and ensure a successful integration (Vermeulen &
Barkema, 2001). Acquirers with more experience are also shown to handle the cultural
differences between the firms with greater sensitivity and are therefore better equipped to
manage cultural distance (Very et al., 1997). In general, firms based in emerging markets do
not have as much international experience as firms from developed countries, and hence cannot
utilise obtained knowledge to the same extent. The lack of experience in combination with the
resource seeking approach, which requires extensive integration capabilities, should reasonably
lead to firms from emerging markets facing more challenges managing cultural distance and
achieving the desired performance post-M&A.

The above argument finds support in Li, Li and Wang (2016) who used a sample of 367 Chinese
firms and found that cultural distance had a negative effect on cross-border M&A performance.
Boateng et al., (2019) also found a negative impact on cross-border M&A performance
stemming from cultural distance. However, using a sample of different emerging market firms,
Aybar and Ficici (2009), contrary to their expectations, found that cultural distance had a
positive impact on cross-border M&A performance. This could potentially be explained by
Malhotra, Sivakumar and Zhu (2011) who argue that emerging markets invest in targets located
in markets with a high market potential which mediate the effect of cultural distance. Gubbi
(2010) further supports this assumption by finding that emerging market firms earn higher
return when investing in developed markets. Although there exist contradictory findings, the
lack of experience and more integration dependent M&A motives should reasonably make the
negative effects of cultural distance more prominent than the potential positive ones. Therefore,
the following hypotheses are constructed:

14
H1: Cultural distance will have a negative effect on emerging market firms’ cross-border M&A
short-term performance

H2: Cultural distance will have a negative effect on emerging market firms’ cross border-M&A
long-term performance

H3: Cultural distance will have a stronger negative effect on the cross-border M&A
performance for emerging market firms compared to developed markets firms in both the short-
and long term

Integrating different cultures is a complex and time consuming procedure. Although Li et al.,
(2020) finds that cultural distance has a positive impact on cross-border M&A performance in
the short-term and a negative impact in the long-term, the initial two years can be a costly affair.
For the initial period after a M&A a lot of time and resources are allocated to ensure a successful
integration. However, after two years of different integration initiatives and processes, people
may assimilate to each other's culture. Creating a new assimilated culture could increase
coordination and learning which enables enhanced performance. Qian (2017) studies abnormal
returns using a sample of 119 Chinese firms and finds that cultural distance has a negative effect
during the initial integration period but the effect shifts in the long-term. The authors argue that
the positive effects in the long-term is because both firms have assimilated which enables
synergies to be realised (Qian, 2017). This could mean that the market’s initial reaction
corresponds to the negative short-term effects related to integrating the different cultures
instead of the actual long-term performance when the firms are assimilated to each other. Hence
the hypothesis is formulated as follows:

H4: Cultural distance will have a less negative effect on long-term accounting-based
performance measures than on the short-term market-based performance measures.

15
3 Method
3.1 Data collection
The data for this study is mainly collected through three sources: Thomson Reuters Eikon,
Datastream and Hofstede Insights. Thomson Reuters Eikon M&A database was used to find
completed cross-border M&A transactions during the time period 1997-2020 and to collect the
relevant information on these deals. Data retrieved from Thomson Reuters Eikon includes
company name of target and acquirer, company origin, announcement date of the M&A, target
and acquirer industry, level of control and the financial data used for control variables as well
as the dependent variables in the accounting-based model. Datastream was used to retrieve data
on acquirers’ stock prices and the respective indices for the acquiring nations which was used
in the event study. Furthermore, Datastream was also used to identify and gather data on
conflicting events during the event windows. Data on the cultural dimensions for both target
and acquiring companies were collected through Hofstede Insights and used to determine the
cultural distance for the respective deals.

3.2 Sample
To test the hypothesis, this study includes cross-border M&A transactions conducted by
emerging market firms and developed market firms between the period 1997 and 2020. Similar
to Malthora et al., (2011), the countries in MSCI Emerging Market index are used as a
representative group for emerging markets (see Appendix table 6). This sample of countries
makes up a wide sample of emerging economies thus adhering to the critique from Deng and
Yang (2015) about previous studies only focusing on one single country, most often China or
India, and therefore not being generalisable to the same extent. To compare the effects of
cultural distance on cross-border M&A performance between emerging market and developed
market firms, this study also includes a range of developed markets from the MSCI Developed
Market index (see Appendix table 6).

This left an initial sample consisting of 6490 unique transactions, whereof 835 was by emerging
market firms and 5655 from developed market firms. In some cases, data were only available
for either market-based measures or accounting-based measures. In order to not lose these
observations, one sample for the accounting-based performance measures and one for the
market-based measures were used based on the same population. This approach is known as

16
listwise deletion and is in accordance with how the problem has been solved by other scholars
such as Li et al., (2020), Boateng et al. (2019) and Chakrabarti, Gupta-Mukherjee, Jayaraman
(2009) to mention a few. For inclusion in the final samples the following restrictions were
imposed (Restrictions i-vii concern all final samples, viii concern the accounting-based sample
and ix concern the market-based sample):

(i) Transactions where the acquirer acquired less than 10% were removed because, according
to the US Department of Commerce, such acquisitions are considered portfolio investments
where the acquiring firm is not involved in managing the target (Boateng et al., 2019).
(ii) All deals where the acquirer or target was located in any tax haven such as Cayman Island
and Jersey were removed to avoid the cultural distance value not being representative due to
tax motivated locations.
(iii) Financial firms were removed since they adhere to different regulations for reporting
(Boateng et al., 2019)
(iv) Both the acquiring firm and target had to be listed since the performance measure in the
market-based model is based on abnormal returns as well as to ensure availability of financial
data used in the accounting-based model and for the control variables (Li, Li and Wang, 2016)
(v) Transactions where data on Hofstedes’ cultural dimensions were missing for either the target
or acquirer were removed since cultural distance could not be measured in those cases.
(vi) Firms lacking a Reuters identification code (RIC), or any other identifier necessary in order
to retrieve information from Thomson Reuters Eikon and Datastream were removed.
(vii) Deals missing relevant financial data for either the acquirer or target for the control or
dependent variables were excluded from the sample.
(viii) For the accounting-based sample, deals completed after 2018 were removed in order to
have available information two years after the transaction necessary to calculate sales growth
and change in profitability.
(ix) Lastly, this study uses an event study methodology to measure short-term performance
(further discussed in section 3.4.1). To ensure that the actual effect of the M&A announcement
is captured it is critical to control that no other information was published during the event
window which could affect the stock price. Therefore, observations where annual reports, other
M&A announcements, quarterly reports and ex dividend announcements were published within
ten days prior or after the specific M&A announcement were removed from the sample used
for measuring stock returns.

17
On the final samples, apparent errors were removed and the sample were winsorized on the 99th
and 1st percentile for some of the variables (see section 3.8). After imposing these restrictions,
the accounting-based sample amounted to 125 transactions by emerging market firms and 837
transactions by developed market firms. The market-based sample consisted of 103 transactions
by emerging market firms and 715 by developed market firms (see Appendix table 6 for an
overview of the observations). The fairly large differences in sample size is due to developed
markets acquirers having been involved in more transactions during the period which is also
reflected by Malhotra, Sivakumar and Zhu (2011).

3.3 Research design

The main purpose with this study is to measure the effect of cultural distance on cross border
M&A performance by emerging market firms. Additionally, this thesis aims to examine if the
effects differ depending on the timeframe of the performance measure and if the acquirer is
from a developed or emerging country. To test the hypothesis, a deductive approach is pursued
which means that the hypothesis is based on what previous research within the field has
concluded. (Bryman and Bell, 2011, p.11). Similar to a lot of previous studies, measuring cross-
border M&A performance an event study was conducted to measure the short-term
performance stemming from cross-border M&A by emerging market firms. However, given
that emerging market firms often engage in cross-border M&A to gain strategic assets which
are usually integrated for long time periods, an event study is not sufficient to capture these
effects. Previous studies on cross-border M&A performance by emerging market firms have
surprisingly almost exclusively focused on short-term performance. Therefore, this study also
measures long-term performance using accounting-based measures in order to fill this gap. A
multiple measurement analysis is also considered more appropriate when measuring complex
affairs such as M&As (Schoenberg, 2006).

In the following sections the variables of the model will be described and a break-down of the
method for measuring each variable will be presented.

3.4 Dependent variables

M&A performance has been studied extensively and researchers have applied various measures
in their attempt to determine performance (Wang & Moini, 2012). The studies measuring

18
performance from a financial perspective have commonly done so using accounting-based
measures (Bertrand & Betschinger, 2012) and market-based measures (Aybar & Ficici, 2009;
Anand, Capron, & Mitchell, 2005).

The dependent variable, post-M&A performance, will hence be divided into short-term market-
based performance and long-term accounting-based performance. Short-term performance will
be measured using cumulative abnormal return (CAR). Long-term performance will be defined
as sales growth and change in profitability. Sales growth will be measured as Compound
Annual Growth Rate (CAGR) after the M&A and change in profitability will be measured as
change in Return on Sales (ROS) following the M&A.

3.4.1 Short-term performance

To measure the impact on a firm’s short-term performance stemming from the cross-border
M&A announcement, an event study is performed which measures a firm's cumulative
abnormal return (CAR). An event study measures performance based on the stock market
reactions of a deal announcement and has been widely used both in the finance and strategy
literature as a proxy for performance (Boateng et al., 2019). The methodology is based on the
assumption that the stock prices reflect all the available information instantly, both financial
and strategic information (MacKinlay, 1997, Kothari and Warner, 2006). Building on this
assumption it is reasonable to assume that the implications of cultural distance should be
adequately reflected in the share price and that CAR is therefore a valid measurement for short-
term performance.

There are several benefits using CAR as a measurement for performance. Firstly, it is
recognised that a firm’s main objective is to create value for their shareholders which is
reflected in the share price (Boateng et al., 2019). Consequently, previous studies measuring
cross-border M&A and the effects of cultural distance have used CAR as a measurement for
performance which also facilitates comparability between this and other studies (Boateng et al.,
2019; Li, Li and Wang, 2016; Aybar and Ficici, 2009, Datta and Puia, 1995). Secondly, since
share prices are assumed to capture both financial and strategic information instantly, CAR is
more accurate than other measurements that need a longer measurement period thus risking to
capture effects from other events (MacKinlay, 1997). Furthermore, CAR is fairly easy to

19
measure and compare between countries because it is not affected by differences in for example
accounting principles (Cording Christmann and King., 2008).

Following the guidelines of MacKinlay (1997) the first step in the event study is to determine
the event. The announcement of the M&A will be considered the event for this study and is
defined as 𝜏=0. In cases where the announcement occurred on a weekend or after the stock
exchange was closed, the first following trading day was used. Secondly, an event window is
determined, which is the period surrounding the announcement that the study aims to examine.
MacKinlay (1997) highlights that it is common to use an extended event window which is
stretching several days before and after the actual announcement. Using an extended event
window captures the effect even if the market may foresee the information before it is
announced or when the market fails to assess the information instantly upon the announcement.
While MacKinlay (1997) argues that using an extended event window is a way to capture the
full effect of an announcement it is also associated with the risk of capturing other events that
may influence the share price, thus limiting the reliability of the specific event of interest
(MacKinlay, 1997). However, Ball and Torus (1988) argue that tests using an extended event
window are still strong and other potential gains from using another approach are negligible.
Similar to previous studies the event window was set to (-1, +1), (-2, +2), (-5, +5) and (-10,
+10) days (Aybar and Ficici, 2009; Boateng et al., 2019).

To assess the normal return which is defined as the expected return during the event window
should the firm not have announced the M&A deal, this study applies an estimation period of
120 days in accordance with MacKinlay (1997). When assessing the normal return, it is
necessary to monitor the share prices during a period which is assumed to not be affected by
the M&A announcement, also called an estimation period. Usually the estimation period is the
time before the event (MacKinlay, 1997). Consequently, the estimation period for this study is
set to 131 days before the M&A announcement to 11 days before the M&A announcement to
avoid overlapping effects between the event window and estimation window (see figure 1 for
an illustration of the event study).

20
Figure 1

Figure 1 - Conceptual illustration of the event methodology

T0 = 131 days before the M&A announcement, T1 = 11 days before the M&A announcement,
T2 = 10 days before the announcement, 0= announcement day and T3= 10 days after the M&A
announcement. Lastly, the dotted lines represent the different event windows used in this thesis.
In addition to (-10,10), the event windows are set to (-5,5), (-2,2) and (-1,1) as they are
considered adequate periods and in line with other scholars (Aybar and Ficici, 2009; Boateng
et al., 2019).

3.4.1.1 Calculating CAR

To assess the effect of a cross-border M&A announcement, the abnormal return needs to be
calculated. Since abnormal return is the difference between the actual return of a stock and the
normal return, an initial estimation of the normal return is required. There are several models
to estimate the normal return, most notably the market model and the constant mean return
model. While the constant mean model assumes that the estimated normal return is a constant
mean for each security, the market model relates a security’s return to the overall market
(MacKinlay, 1997). MacKinlay (1997) argues that the advantage with the market model is that
it takes the variation of the market return into account and therefore reduces the variance which
could increase the chances of detecting an event’s effect. Consequently, the market model was
applied to measure the normal return which is also widely used in the cross-border M&A
literature to determine normal returns (Boateng, 2019; Li, Li and Wang 2016; Aybar and Ficici,
2009). The following formula is used to estimate the coefficients which is later used in model
(3) to assess the normal return for assets by the market model.

𝑅$% = 𝛼$ + 𝛽$ 𝑅*% + 𝜀$% (1)

21
𝑅$% is the return for company 𝑖 at time 𝜏 while 𝑅*% is the return of the market portfolio at time
𝜏. To proxy the market portfolio a wide domestic index is used according to each specific
acquiring firm’s nationality i.e where the HQ is registered (see a list of indices in Appendix
table 7). 𝛼$ is the intercept for firm 𝑖 and 𝛽$ is the OLS-estimator for firm while 𝜀$% is the part
of the return which can not be explained by the market model, i.e. the error term. The error term
is assumed to be zero

Once the normal returns are estimated the following formula is used to measure the abnormal
return for company 𝑖 during time 𝜏.

𝐴𝑅$% = 𝑅$% − 𝐸(𝑅$% ) (2)

𝐴𝑅$% is the abnormal return for company 𝑖 during time 𝜏 which is estimated by subtracting the
estimated normal return from the actual return. 𝑅$% represents the actual return while 𝐸(𝑅$% ) is
the estimated normal return.

This is modelled as follows:

𝐴𝑅$% = 𝑅$% − (𝛼32 + 𝛽4$ 𝑅*% + 𝜀$% ) (3)

𝛼32 and 𝛽4$ is the estimated variables from the market model during the estimation period.

To analyse and draw inferences to the event, the abnormal return needs to be aggregated over
time and across securities using cumulative abnormal return (𝐶𝐴𝑅). 𝐶𝐴𝑅 is the sum of all
abnormal returns (𝐴𝑅$,% ) during the first day to the last day of the event window and is
calculated through the equation (4):

%
𝐶𝐴𝑅$%7, %8, = ∑%:%;
8
𝐴𝑅$,% (4)

To enable more generalisable conclusions regarding the sample, the cumulative average
abnormal return (𝐶𝐴𝐴𝑅$ (𝜏; 𝜏< )) is calculated though the formula (5):

;
𝐶𝐴𝐴𝑅$ (𝜏; 𝜏< ) = = ∑=
$:; 𝐶𝐴𝑅%7,%8 (5)

22
The final step in the event study is to perform a t-test in order to test if the abnormal return is
significantly larger than zero. For the t-test, the variance of 𝐶𝐴𝐴𝑅 is required which is
calculated through formula (6):

;
𝑣𝑎𝑟(𝐶𝐴𝐴𝑅(𝜏; , 𝜏< ) = =8 ∑= <
$:; 𝜎$ (𝜏; , 𝜏< ) (6)

Lastly, a t-test is performed to determine if the 𝐶𝐴𝐴𝑅 is significantly greater than zero:

CDDE(%7 ,%8 )
𝜃= (7)
FGH(CDDE(%7 ,%8 ))7/8

3.4.2 Long-term performance

There are various accounting metrics for measuring performance, where sales growth and
profitability have been widely used, both separately and jointly to measure a firm's
performance. To gain a more exhaustive assessment of a firm's performance both sales growth
and profitability is used as measures for long-term performance, which is in line with
(Fernhaber och Li, 2010; Zhou and Wu, 2014). Sales growth has been deemed an appropriate
measure for performance when studying a process-based phenomenon such as M&A (Morsini,
Shane and Singh, 1998). Therefore, similarly to Morsini, Shane and Singh (1998) growth will
be measured as the compound annual growth rate (CAGR) of a firm's sales. Sales will be
measured during a two-year period from the announcement of the deal which have been
recognised as sufficient time to capture any long-term impacts following the integration and
knowledge exchange (Zollo and Meier, 2008). In addition, previous literature suggests that
overall M&A performance is heavily influenced by the initial two years of the post-M&A
process, which also makes this time period appropriate (Jemison and Sitkin, 1986; Morsini,
Shane and Singh, 1998). Sales CAGR for company 𝑖 will therefore be calculated as follows:
;
𝑆𝑎𝑙𝑒𝑠%8 R
𝑆𝑎𝑙𝑒𝑠 𝐶𝐴𝐺𝑅 = O Q −1
𝑆𝑎𝑙𝑒𝑠%P

23
Where 𝑆𝑎𝑙𝑒𝑠 is the total sales of the entity, 𝜏T is the period directly after the announcement and
𝜏< is the sales two years after the transaction. 𝑛 is the number of years between 𝜏T and 𝜏< .

To measure profitability, Return on Sales (ROS) will be used, which is in line with previous
studies (Lu and Beamish, 2006). Similarly to when calculating growth, ROS will be measured
as the change over a two-year period for the reasons previously discussed. Thus, the formula to
calculate ROS is the following:

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑆𝑎𝑙𝑒𝑠 =
𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑅𝑂𝑆 = 𝑅𝑂𝑆%< − 𝑅𝑂𝑆%T

3.5 Independent variables

The main purpose with this study is to examine how cultural distance affects cross-border M&A
performance pursued by emerging firms. To measure this effect a multiple regression is
performed including the main independent variable, cultural distance, and control variables that
may affect cross-border M&A performance. Similar to previous studies the model includes
some of the most common control variables in the cross-border M&A literature discussed in
section 3.6.

3.5.1 Cultural distance

In accordance with many previous studies, the main independent variable, Cultural distance,
was measured by using differences in Hofstede’s national dimensions between the home
country and host country (Hofstede, 1980). Hofstede (1980) created a conceptual framework of
four national dimensions which is assumed to measure values and norms of certain countries.
Even though there exist other measures such as the GLOBE dimensions, the cultural framework
of Hofstede (1980) has been widely used in previous literature (Datta and Puia, 1995,
Chakrabarti, Gupta-Mukherjee, Jayaraman, 2009; Aybar and Ficici, 2009; Li, Li and Wang,
2016). Although an updated version of Hofstede’s cultural framework with two additional
dimensions has been introduced, the original four dimensions was applied in this study since a

24
lot of data was missing on the additional two dimensions. To operationalise the cultural
dimensions, Kogut and Singhs (1998) index is used. With this index, Kogut and Singh (1998)
have managed to conceptualise cultural distance which otherwise is of a multidimensional
character (Malhotra, Sivakumar and Zhu, 2011). For this reason, the index is a common
measurement for cultural distance within the cross-border M&A literature and is calculated as
follows:

𝐶𝐷a = bc(𝐼$a − 𝐼$e )< /𝑉$ g/4

$:;

CD𝑗 = Cultural distance between 𝑗th country and the home country
𝐼$a = index for of the 𝑖th Hofstede’s cultural dimension and 𝑗th country
𝐼$e = index for the 𝑖th Hofstede’s cultural dimension and home country
𝑉$ = Variance of the index of the 𝑖th dimension.

3.6 Control variables

In addition to cultural distance, there are numerous factors identified in the literature that are
likely to affect the performance of a cross-border M&A, both measured with market- and
accounting-based measures. Since CAR reflects the market's expectations of the M&A it
should, provided that the outcome is in line with the exceptions, be rather coherent with the
firm's long-term performance. Although there does not seem to be a complete agreement in the
literature regarding which factors are most important to consider in M&A performance studies,
some have been included frequently and their impact have been confirmed in several studies.
The control variables used in this study, which are also some of the most widely used in the
literature on cross-border M&A performance, are presented below.

Industry relatedness between the two firms is defined based on the similarity of the acquirer
and target industry (Markides & Ittner, 1994). Studies have argued that higher relatedness
should enhance post-M&A performance as this can enable economies of scale, synergies as
well as increase market power (Stillman, 1983; Datta, 1991; Lubatkin, 1983). Montgomery
(1987) and Shelton (1988) further confirmed this by showing that related acquisitions created
more shareholder value than unrelated ones. Deals between two related firms are hence

25
expected to result in positive performance on all measures used in this study. Industry
Relatedness between the two firms will be measured using a dummy variable based on if the
acquiring and target firm operates in the same industry or not.

Acquirer size, measured as the logarithm of the acquirer's revenue at the time of the acquisition,
should have a direct effect on the cross-border M&A performance. Larger firms possess more
resources and have better capabilities to manage challenges associated with cross-border M&As
such as liability of foreignness and cultural distance (Boateng et al., 2019). This could mean
better ability to create value and better synergy realization (Li Li and Wang, 2016; Reus &
Lamont, 2009), which should hence lead to increased performance both in terms of short-term
abnormal returns as well as long-term profitability. Acquirer size is therefore expected to have
a positive impact on both CAR and change in ROS. However, since larger firms might have
more limited growth opportunities, sales CAGR is not expected to increase.

Target size will also have an impact on post-M&A performance. Larger M&As are shown to
be associated with more complexity than smaller ones (Ellis et al., 2011; Haunschild, 1994).
However, a larger deal size will lead to greater market power, better possibilities to achieve
economies of scale and synergies and it also means that the target’s business is already proven
(Lou & Peng, 1999; Du & Boateng 2015). The size of the acquired firm also indicates that there
are more resources and knowledge within the acquired firm, which may affect the performance
(Ellis et al., 2011). Given the two competing arguments, no particular effect is expected from
target size but rather it is expected that target size can have both a negative and positive effect
on the performance measures included in this study. The size of the acquisition will be measured
by the logarithm of target revenue at the announcement date as there were significant data
limitations on deal value.

The Relative firm size between the firms is also shown to have an impact on performance. A
larger relative size will lead to a greater impact on the acquirer but it will also mean challenges
in the integration process since larger firms have a more established culture and may act
dominantly, meaning that they may be less likely to conform to the other firms‘ preferences
(Cannella and Hambrick, 1993). On the contrary, a larger relative size might indicate a larger
target and therefore a more established firm which might mean that the firm has better
prerequisites to perform well in the near future. Therefore, relative size is expected to have an

26
impact on performance but not in a particular direction. The relative size of the firms will be
measured as the target revenue divided by acquirer revenue at the announcement date.

The Level of control is another factor that has been found to affect post-M&A performance. By
acquiring a majority stake in the target, it gives the acquirer control and flexibility as well as
more influence of their managerial actions, which should enhance performance (Du & Boateng
2015). Level of control is hence expected to have a positive impact on CAR, change in ROS
and Sales CAGR. The level of control will be measured as the acquired stake in the target.

Pre-acquisition performance, measured as the acquirers Return on Assets prior to the

announcement (Acquirer ROA prior), has been emphasized as an affecting factor in previous
literature. This is based on the argument that firms have better possibilities to perform well after
the M&A if they performed well before the M&A (Haleblian & Finkelstein, 1999; Markides &
Ittner, 1994). However, since already profitable firms’ will not have the same ability to further
increase profitability, Acquirer ROA prior is expected to have a positive impact on Sales CAGR
and CAR but a negative impact on change in ROS.

The Year of the announcement may also affect the overall performance of the M&A. For this
thesis, events such as the financial crisis 2007-2009 and the Covid-19 pandemic 2020 is relevant
since these most likely have a considerable effect on both Sales CAGR, Change in ROS and
CAR (-1,1).

Firms Sales CAGR, Change in ROS and CAR (-1,1) may also differ depending on Industry.
Therefore, fixed industry effects are controlled for by using a dummy variable based on Eikons
industry classification codes (TRBC).

3.7 Final Models (short-term and long-term-performance)

Since it has been identified in previous literature that several factors affect the cross-border
M&A performance it is appropriate to perform a regression model (MacKinley, 1997). To
measure to what extent the variance in Sales CAGR, Change in ROS and CAR (-1,1) can be
explained by any of the independent variables, especially cultural distance, a multiple
regression model is used. After having operationalised cultural distance and determined what

27
control variables to include based on previous studies, the final models for Sales CAGR, Change
in ROS and CAR (-1,1) is as follows:

𝑆𝑎𝑙𝑒𝑠 𝐶𝐴𝐺𝑅$,k = 𝛼 + 𝛽; 𝐶𝑢𝑙𝑡𝑢𝑟𝑎𝑙 𝐷𝑖𝑠𝑡𝑎𝑛𝑐𝑒$ + 𝛽< 𝐿𝑒𝑣𝑒𝑙 𝑜𝑓 𝐶𝑜𝑛𝑡𝑟𝑜𝑙$ + 𝛽n 𝐴𝑐𝑞𝑢𝑖𝑟𝑒𝑟 𝑠𝑖𝑧𝑒$

+ 𝛽i 𝑇𝑎𝑟𝑔𝑒𝑡 𝑠𝑖𝑧𝑒$ + 𝛽q 𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝑓𝑖𝑟𝑚 𝑠𝑖𝑧𝑒$ + 𝛽s 𝐴𝑐𝑞𝑢𝑖𝑟𝑒𝑟 𝑅𝑂𝐴 𝑝𝑟𝑖𝑜𝑟$
+ 𝛽t 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝑟𝑒𝑙𝑎𝑡𝑒𝑑𝑛𝑒𝑠𝑠$ + b 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦R + b 𝑌𝐸𝐴𝑅R + 𝜀$

𝐶ℎ𝑎𝑔𝑒 𝑖𝑛 𝑅𝑂𝑆$,k
= 𝛼 + 𝛽; 𝐶𝑢𝑙𝑡𝑢𝑟𝑎𝑙 𝐷𝑖𝑠𝑡𝑎𝑛𝑐𝑒$ + 𝛽< 𝐿𝑒𝑣𝑒𝑙 𝑜𝑓 𝐶𝑜𝑛𝑡𝑟𝑜𝑙$ + 𝛽n 𝐴𝑐𝑞𝑢𝑖𝑟𝑒𝑟 𝑠𝑖𝑧𝑒$
+ 𝛽i 𝑇𝑎𝑟𝑔𝑒𝑡 𝑠𝑖𝑧𝑒$ + 𝛽q 𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝑓𝑖𝑟𝑚 𝑠𝑖𝑧𝑒$ + 𝛽s 𝐴𝑐𝑞𝑢𝑖𝑟𝑒𝑟 𝑅𝑂𝐴 𝑝𝑟𝑖𝑜𝑟$
+ 𝛽t 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝑟𝑒𝑙𝑎𝑡𝑒𝑑𝑛𝑒𝑠𝑠$ + b 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦R + b 𝑌𝐸𝐴𝑅R + 𝜀$

𝐶𝐴𝑅 (−1,1)$,k = 𝛼 + 𝛽; 𝐶𝑢𝑙𝑡𝑢𝑟𝑎𝑙 𝐷𝑖𝑠𝑡𝑎𝑛𝑐𝑒$ + 𝛽< 𝐿𝑒𝑣𝑒𝑙 𝑜𝑓 𝐶𝑜𝑛𝑡𝑟𝑜𝑙$ + 𝛽n 𝐴𝑐𝑞𝑢𝑖𝑟𝑒𝑟 𝑠𝑖𝑧𝑒$

+ 𝛽i 𝑇𝑎𝑟𝑔𝑒𝑡 𝑠𝑖𝑧𝑒$ + 𝛽q 𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝑓𝑖𝑟𝑚 𝑠𝑖𝑧𝑒$ + 𝛽s 𝐴𝑐𝑞𝑢𝑖𝑟𝑒𝑟 𝑅𝑂𝐴 𝑝𝑟𝑖𝑜𝑟$
+ 𝛽t 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝑟𝑒𝑙𝑎𝑡𝑒𝑑𝑛𝑒𝑠𝑠$ + b 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦R + b 𝑌𝐸𝐴𝑅R + 𝜀$

Additionally, standardised dependent variables are also presented in order to better enable a
comparison between the different performance measures and especially between the short-term
CAR and the long-term accounting-based measures. By standardising the dependent variables,
the regression coefficients will instead refer to how many standard deviations the dependent
variable will change per one unit change in the independent variables.

In order to standardise the variable, the mean and variance of the variable in the sample will be
calculated according to below figure:
=
1
𝑦xy = b 𝑦$y
𝑁
$:;

=
1
(𝑆y ) = b(𝑦$y − 𝑦xy )<
<
𝑁
$:;

Were 𝑦$y is the dependent variable for each transaction, 𝑦xy is the mean of the dependent variable
for all transactions and (𝑆y )< is the variance of the dependent variable for all transactions.

28
Then the standardised variable (𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑𝑖𝑠𝑒𝑑 𝑦$y ) can be calculated by subtracting the
dependent variable mean from each individual transaction’s dependent variable value and
dividing by the standard deviation (z(𝑆y )< ) of all transactions according to the following
formula:

(𝑦$y − 𝑦xy )
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑𝑖𝑠𝑒𝑑 𝑦$y =
z(𝑆y )<

3.8 Statistical control

Since OLS-regression is used throughout this study there are a couple of assumptions that need
to be considered. Firstly, an OLS-regression assumes that homoscedasticity exists within the
researched sample. If there is an absence of homoscedasticity in the sample it means that
heteroscedasticity may exist which limits the possibility to draw significant and generalisable
conclusions about the results. To account for heteroscedasticity this study uses the robust
standard errors to determine the significance for each variable included in the OLS-regression
(Murray, 2006, p.419-420). Also, the logarithm was used for some variables (Acquirer size and
Target size) to reduce the heteroscedasticity (Murray, 2006, p.420-421). Secondly, various tests
were performed of the variables to control for multicollinearity. Multicollinearity means that
one or more of the independent variables correlate with each other which may ultimately
impede the reliability of the study. To control for multicollinearity, a VIF-test was performed
and the cut-off point is set at 10 (Pallant, 2016, p.159).

Regarding the assumption of normality, the size of the sample is considered large enough to
assume that normality exists in accordance with the central limit theorem (Körner and Wahgren,
2015 p.113). A minimal amount of normalisation procedures has been inferred on the data
sample in order to gain a representable relationship between performance and cultural distance.
However, a few extreme values were identified that affected the whole sample in a misleading
fashion. To mediate the effect, values that were obvious errors were removed and the sample
were winsorized on the 1th and 99th percent level for Change in ROS, Relative Size and Sales
CAGR.

29
3.9 Reliability and validity
According to Bryman and Bell (2015, p. 46) reliability refers to whether or not the results of a
study are repeatable. Reliability is particularly important in quantitative research in order to
gain credibility. The reliability may be determined by evaluating the data collection and what
method that is used to measure a specific phenomenon. In regards to this study all the data is
sourced from Eikon Datastream which is a widely recognised database and there is no reason
to doubt the reliability of that data. Furthermore, this study presents a transparent description
of the data collection which allows any other researcher to use the same dataset and perform a
similar study with the same result. The market-based approach and the accounting-based
approach is widely used by previous research from prestigious journals and is an accepted
approach to measure cross-border M&A performance (Li, Li and Wang, 2016; Boateng, 2019;
Aybar and Ficici, 2009; Chakrabarti, Gupta-Mukherjee, Jayaraman, 2009; Morsini, Shane and
Singh, 1998). Lastly, the different statistical tests and the OLS-regression is performed in SPSS
and STATA which are two statistical programs commonly used to analyse data. There is no
reason to doubt the reliability of either the data, method or the software used to run the statistical
tests.

Validity can be divided into internal validity and external validity. The former is concerned
with whether or not the study manages to measure what is intended (Bryman and Bell, 2015, p.
47). In the case of this study it is important to assess whether CAR, Change in ROS and Sales
CAGR are valid measures for performance. Once again one can refer to the wide extent of
literature that has previously used these measures which add further validity to the study. In
addition, all the included variables are motivated by previous empirical studies from prestigious
journals.

To assess internal validity it is crucial to assess whether or not the effect on performance stems
from the specific cross-border M&A announcement. To mediate the risk of including other
effects an elimination has been made of observations where confounding events occur during
the event window. However, for the accounting-based approach it is more difficult to derive
the effect to the specific M&A event. Even so the accounting-based approach is widely used as
a long-term performance measure and thus the overall internal validity of the study is deemed
sufficient. External validity exists if the results of the study may be generalized in other research

30
contexts (Bryman and Bell, 2015, p.47). The sample of both emerging and developed market
firms consists of firms from a vast range of countries which enhance the external validity.

3.10 Robustness test

To further enhance the reliability of the study a robustness test is performed. Since Hofstede’s
cultural dimensions have been the target of extensive critique, an alternative measure will be
used for cultural distance to check the robustness of the model. The GLOBE project has
frequently been discussed as an alternative measure to Hofstede’s cultural dimensions and is
by some considered to be more comprehensive and theoretically sound (Javidan, Dorfman, de
Luque and House, 2006; Dikova and Sahib, 2014)

The Kogut and Singh formula will be used to gain a cultural index based on the GLOBE project
scores. Similar to Dikova and Sahib (2014) the cultural scores used are the “as is” rather than
the “should be” since they measure the reality rather than what is desired.

3.11 Limitations of the method

There are some limitations to the method of this study which mainly concerns the theoretical
framework and the operationalisation of cultural distance and long-term performance.
Hofstede’s cultural dimensions have been widely criticised throughout the years by different
researchers. McSweeney (2002) questions whether Hofstede’s dimensions collectively are
valid representatives for national culture. The author highlights several limitations to
Hofstede’s study. Firstly, Hofstede assumes that using respondents from one single firm (IBM)
would isolate the cultural differences. However, McSweeney (2002) argues that within a global
company it most likely exists several organisational subcultures which could influence the
perceived cultural differences rather than national culture. Secondly, Hofstede uses surveys to
collect data which may be influenced by how the question is framed. Thirdly, for some of the
countries the number of respondents are few which may affect the reliability of the results.
Lastly, Hofstede has received criticism about the IBM data set being old and obsolete
(McSweeny, 2002). Even so, Hofstede’s national dimensions are continuing to be a widely used
framework to measure cultural distance and have also received support for being the most
influential contribution to cultural research (Triandis, 2004).

31
Measuring long-term performance in cross-border M&A is quite complex since other events
may influence the performance after the actual transaction. To mediate such effects, this study
has controlled for other events after the deal, however, there may be other factors influencing
the performance which are difficult to identify and hence control for. Secondly, there is risk of
survival bias since firms that lacked data two years after the M&A were removed. Hence any
eventual bankruptcy is not accounted for which might mean that the accounting-based measures
shows better performance than what is the case in the entire population. Lastly, using
accounting-based measures is exposed to differences in accounting standards between countries
which may affect the comparability of these measures. However, previous studies have also
used the accounting-based measures as a proxy for long-term performance and argue that it is
a valid approach (Morsini, Shane and Singh, 1998; Stahl and Voight, 2008)

32
4 Results
4.1 Descriptive
Table 1 presents the descriptive statistics on variables for both developed and emerging markets
with a further specification of the samples depending on if the measurement is accounting-
based (Sales CAGR and Change in ROS) or market-based (CAR (-1,1)). From the emerging
market sample one can identify that the average cultural distance is 2.13 for the sample where
performance is measured using accounting metrics while it is 2.08 in the sample where CAR (-
1,1) is used. The developed market sample has a cultural distance mean of 1.46. This shows
that emerging market firms in this sample engage in M&As with a higher cultural distance than
developed market firms. On average emerging markets acquire 46% of the target in the
accounting-based sample and 45% of the target in the market-based sample. This can be
compared with developed market firms which on average acquire a larger part of their target
with an average Level of control of 67%. Lastly, of all the transactions within the emerging
markets and developed markets sample, 46% - 50% was same sector deals, indicating that many
of the deals are motivated by synergies and complementing capabilities.

By looking at the descriptive data, one can identify that there is a large spread in some of the
variables, especially Relative firm size where the values range from 0.00 to 8.38. The high max
value shows that in some of the transactions the target is substantially larger than their acquirer
which may be explained by these acquirers being financially supported by a larger entity. In
some of these deals the acquirer was Chinese where state ownership is common (Li, Li & Wang,
2016).

Although rather similar, both average Sales CAGR and CAR (-1,1) following the transaction
are higher in emerging market firms indicating that the market has higher expectations on the
deal at the announcement date which may be due to greater possibilities for operational
improvements and higher growth.

33
Table 1
Accounting-based samples Market-based samples
Emerging acquirers Min Max Avg. St.Dev N Min Max Avg. St.Dev N
Sales CAGR -0,32 1,09 0,20 0,23 125 n.a. n.a. n.a. n.a. n.a.
Change in ROS -0,85 0,56 -0,06 0,16 125 n.a. n.a. n.a. n.a. n.a.
CAR (-1,1) n.a. n.a. n.a. n.a. n.a. -0,09 0,18 0,01 0,04 103
Cultural Distance 0,09 5,68 2,13 1,51 125 0,09 5,27 2,08 1,45 103
Level of control 0,10 1,00 0,46 0,34 125 0,10 1,00 0,45 0,33 103
Acquirer size 13,47 25,86 21,33 1,83 125 13,47 25,86 21,28 2,03 103
Target size 10,40 22,66 18,98 2,42 125 10,40 23,11 18,90 2,52 103
Relative firm size 0,00 5,57 0,43 0,85 125 0,00 5,57 0,48 1,04 103
Acquirer ROA prior -0,23 0,29 0,08 0,07 125 -0,72 0,29 0,06 0,11 103
Industry relatedness 0,00 1,00 0,50 0,50 125 0,00 1,00 0,48 0,50 103
Developed acquirers Min Max Avg. St.Dev N Min Max Avg. St.Dev N
Sales CAGR -0,44 3,56 0,16 0,32 837 n.a. n.a. n.a. n.a. n.a.
Change in ROS -1,67 0,61 -0,04 0,20 837 n.a. n.a. n.a. n.a. n.a.
CAR (-1,1) n.a. n.a. n.a. n.a. n.a. -0,20 0,22 0,00 0,05 715
Cultural Distance 0,02 9,00 1,46 1,37 837 0,02 9,00 1,46 1,39 715
Level of control 0,10 1,00 0,66 0,37 837 0,10 1,00 0,67 0,37 715
Acquirer size 11,80 26,77 22,37 1,99 837 11,80 26,77 22,29 2,03 715
Target size 8,70 24,60 19,51 2,15 837 8,70 25,38 19,57 2,09 715
Relative firm size 0,00 4,61 0,29 0,65 837 0,00 8,38 0,36 1,02 715
Acquirer ROA prior -1,13 1,44 0,07 0,12 837 -1,13 1,44 0,07 0,13 715
Industry relatedness 0,00 1,00 0,46 0,50 837 0,00 1,00 0,47 0,50 715

Table 1 – Illustration of the descriptive statistics for all the variables included in the regression models, including min/max
values, mean, standard deviation, and number of observations.

4.2 Correlations
Table 2 presents Pearson's correlation matrix with the associated significance level for both the
dependent and independent variables. By looking at the emerging market sample one can see
that cultural distance is negatively correlated with Change in ROS and positively correlated
with CAR (-1,1) on the 5% and 10% level respectively. An insignificant correlation between
cultural distance and Sales CAGR is observed and no significant relationship can be assumed
between these to variables in isolation. Worth noticing is that none of the variables correlate
with Sales CAGR on a statistically significant level which could raise the question whether or
not Sales CAGR is an appropriate measure of performance in an emerging market context.
Acquirer size and Acquirer ROA prior to the M&A both have a significant correlation with
Change in ROS. Acquirer size is positively correlated with Change in ROS while Acquirer ROA
prior is negatively correlated with Change in ROS.

34
For the developed market firms cultural distance is negatively correlated with Sales CAGR on
a 5% level. No significant correlation could be identified between cultural distance and CAR (-
1,1) or cultural distance and Change in ROS. Acquirer size is significantly correlated with all
of the dependent accounting variables. There is no problem with multicollinearity, since none
of the internal correlations exceeds -0.7 or +0.7 (Pallant, 2016, p.159). Furthermore, the highest
observed VIF-value is 2.4 which is far below the cut-off value of 10 (Pallant, p.159) (see VIF-
values for all variables in Appendix table 8). This further limits the concern of
multicollinearity.

35
Table 2

Table 2 - illustration of the pairwise correlations between the key variables included in the regression models. *- shows a
significance of 10%, ** - significance of 5% and ***- significance of 1%

36
4.3 Regression
4.3.1 Abnormal returns

Before investigating the impact of cultural distance on short-term performance, one needs to
assess whether or not it even occurs abnormal returns surrounding the M&A announcement.
Table 3 presents the mean cumulative abnormal return (CAAR) in different event windows for
both the emerging market and the developed market sample with associated t-values (t-value
above +/-1.96 indicates significance). Looking at the -1,1 event window one can see that there
is a significant abnormal return for both developed and emerging market firms. As discussed in
part 3.4.1 information leakage may occur or the market may fail to assess the information
instantly. Therefore, several event windows were used to assess if there occurred an abnormal
return. The values in Table 3 suggest that there is a statistically significant positive CAAR for
all the event windows except (-10,10) which may be because the effect is likely most noticeable
close to the announcement. Overall the similar results over all the event windows suggest that
the results are robust, namely that both emerging market firms and developed market firms
experience enhanced short-term performance after a cross-border M&A announcement. Since
a shorter event window may better isolate the effect of a M&A announcement the window (-
1,1) will be used to assess cultural distance effect on short-term performance.

Table 3
Emerging markets Developed markets
Event window CAAR (%) t-value CAAR (%) t-value
CAAR (-10,10) -0,42 -0,771 0,39 2,136
CAAR (-5,5) 1,27 2,079 0,46 3,276
CAAR (-2,2) 1,18 2,156 0,33 1,830
CAAR (-1,1) 0,85 3,363 0,14 2,394

Table 3 - Showing the average cumulative abnormal return for different event windows with an associated t-value. The leftmost
section considers emerging market firms while the other represents developed market firms.

4.3.2 Regression results

Table 4 presents the results from the regression model performed in the study. Each model
contains all the control variables and only differs in what dependent variable is used. Models
1-3 are applied for emerging market firms while 4-6 are used for the developed market firms.
Model 1 and 4 includes Sales CAGR as a dependent, Model 2 and 5 includes Change in ROS
while Model 3 and 6 uses CAR (-1,1) as the dependent variable.

37
Model 1 finds that Acquirer ROA prior has a strong significant positive effect on Sales CAGR.
Cultural distance shows an insignificant coefficient of 0.011. Model 2 shows that cultural
distance has a statistically significant negative impact (5% level) on Change in ROS with a
coefficient of -0.029. Thus, this study finds support for hypothesis 2, namely that Cultural
distance has a negative effect on long-term performance. Except Cultural distance, Level of
control, Target size, Relative firm size and Acquirer ROA prior shows significant coefficients
in model 2. Target size shows a significant positive effect while Level of control, Relative firm
size and Acquirer ROA prior shows a statistically significant negative effect. Model 3 finds
that Cultural distance has a positive effect on CAR (-1,1) with a coefficient of 0.006, however,
the effect is not statistically significant and therefore no support is found for hypothesis 1.

Model 4 shows negative significant effect of Acquirer size and positive significant effect of
Relative firm size, Acquirer ROA prior and Industry relatedness. No significant effect is
observed for cultural distance and therefore hypothesis 3 is not supported. Lastly, looking at
model 5, one can see that Acquirer size has a significant positive effect on Change in ROS. For
both model 5 and 6 Cultural distance has no significant effect and can therefore not help support
either hypothesis 3 or 4.

Only Model 2 shows a significant negative effect on performance stemming from Cultural
distance. Therefore, hypothesis 2 is supported while none of the other hypotheses can be
statistically supported.

The R-squared differs between the different variables. This means that the extent to which the
variance in the dependent variable can be explained by the independent variables varies
depending on performance measurement and whether the firm is from a developed or emerging
market. The rather high R-squared is affected by the many dummy variables that control for
both fixed year- and industry effects.

The standardised values are presented in model 7 - 12 (see Appendix table 9) and support the
findings of the original models (models 1-6). The results indicate that Cultural distance has the
greatest effect on Change in ROS in the emerging market sample with a coefficient of -0.029.
Cultural distance only shows significant Change in ROS, but the coefficient indicates that
Cultural distance has a greater effect on CAR (-1,1) then on Sales CAGR.

38
 Table 4

Emerging Developed
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Sales CAGR Change in ROS CAR -1,1 Sales CAGR Change in ROS CAR (-1,1)
Cultural Distance 0,011 -0,029** 0,006 0,000 0,000 0,001
(0,017) (0,014) (0,004) (0,006) (0,004) (0,001)
P-value 0,524 0,042 0,121 0,938 0,934 0,571
Level of control 0,084 -0,081* 0,026 0,032 0,022 -0,002
(0,069) (0,045) (0,019) (0,026) (0,018) (0,005)
P-value 0,229 0,072 0,165 0,220 0,214 0,681
Acquirer size 0,004 0,007 -0,005 -0,032*** 0,017** 0,001
(0,021) (0,010) (0,004) (0,008) (0,008) (0,001)
P-value 0,849 0,441 0,205 0,000 0,038 0,335
Target size -0,018 0,015* -0,003 -0,002 0,002 0,000
(0,015) (0,008) (0,003) (0,007) (0,005) (0,001)
P-value 0,211 0,061 0,288 0,823 0,680 0,817
Relative firm size 0,018 -0,034** 0,008 0,249*** -0,023 0,000
(0,053) (0,014) (0,007) (0,056) (0,029) (0,004)
P-value 0,735 0,015 0,313 0,000 0,432 0,916
Acquirer ROA prior 0,969** -0,979*** 0,096 0,375* 0,102 -0,025
(0,410) (0,300) (0,085) (0,200) (0,173) (0,029)
P-value 0,020 0,002 0,265 0,061 0,557 0,397
Industry relatedness -0,070 0,036 -0,002 0,040** 0,004 0,001
(0,053) (0,027) (0,011) (0,017) (0,014) (0,004)
P-value 0,192 0,192 0,828 0,017 0,754 0,892

N 125 125 103 837 837 715

R-sq 0,337 0,488 0,366 0,437 0,110 0,058
Fixed year effects Y Y Y Y Y Y
Fixed industry effects Y Y Y Y Y Y

Table 4 - Presents the effects cultural distance and other independent variables has on firm performance (Sales CAGR; Change
in ROS and CAR -1,1). Robust standard errors are presented in the parenthesis. *- shows a significance of 10%, ** -
significance of 5% and ***- significance of 1%

39
5 Analysis
5.1 Analysis of findings

Most of the control variables that were significant had the expected effect on performance.
However, the effects of Level of control, Relative firm size and Acquirer size were somewhat
contrary to the expectations. Firstly, Level of control had a negative effect on Change in ROS.
This could be because a larger acquired stake also means that the firm will be more affected by
the future performance of the target, including when the performance is negative. The varied
direction of the coefficients across the models are in line with previous studies (Aybar & Ficici,
2009), which indicates that the acquired stake perhaps rather strengthens the effects, regardless
of if it is positive or negative. Secondly, Relative firm size had both a negative and positive
significant effect depending on measurement and whether the sample consisted of developed
market firms or emerging market firms. However, this is in line with Slangen (2006) who finds
a positive significant impact for developed market firms and Aybar and Ficici (2009) who find
a negative impact for emerging market firms. Relative firm size had a significant negative effect
on Change in ROS for both emerging market firms and developed market firms. This is in line
with the argumentation that integration of larger firms may prove more challenging since they
often have an established and sometimes dominant culture. Thirdly, Acquirer size has a negative
effect on Sales CAGR which is contrary to the expectations. The results suggest that larger firms
may have less potential to grow as fast as smaller firms and are hence not necessarily related to
the M&A. The negative coefficient is in line with Morsini, Shane and Singh (1998).

The first hypothesis (H1), that cultural distance will have a negative effect on emerging market
firms cross-border M&A short-term performance, finds no support which is shown in Table 4
(Model 3). The findings suggest that Cultural distance, contrary to the expectations, may have
a positive effect on the short-term performance for emerging market firms. If Cultural distance
increases with one unit, CAR (-1,1) would increase with 0.6%, meaning that the stock return
increases with 0.6% in excess of the market returns. The magnitude of changes in CAR(-1,1)
may seem negligible but it is in accordance with Aybar and Ficici (2009) that find a positive
effect of 0.38%. This thesis’ findings are in line with some of the previous literature discussed
in section 2.3 which argue that Cultural distance is a source of enrichment that allows new
capability and routines to be developed (Chakrabarti, Gupta-Mukherjee, Jayaraman, 2009;
Morsini, Shane and Singh, 1998).

40
When analysing the data sample, it became evident that a lot of the transactions with a high
Cultural distance were directed to developed market firms. As mentioned in section 2.4,
emerging market firms are motivated to engage in M&A by strategic resources and capabilities
which are more frequently encountered in developed markets. This is also suggested by the
findings of Malhotra, Sivakumar and Zhu, (2011) who highlight that emerging market firms
may mediate the effects of Cultural distance by investing in economically attractive markets.
Gubbi et al., (2010) also emphasise that emerging markets earn a higher return when acquiring
targets in developed markets since the potential for capability absorption is substantial. Thus,
in this sample the cultural effect may be influenced by investments conducted in economically
sound markets where the potential for new capability development is substantial. Although the
results provide indications contrary to hypothesis 1, the t-value amounts to 1.55 with a p-value
of more than 10%. Thus no statistical significance can be assured and therefore the results are
not enough to either reject or support hypothesis 1. For developed market firms the effect of
Cultural distance on CAR (-1,1), as seen in Model 6, is significantly lower with a coefficient of
only 0.1%, indicating that Cultural distance is not a major factor determining the short-term
performance of cross-border M&A. Furthermore, the results are highly insignificant which
further supports this statement.

The second hypothesis (H2), that cultural distance will have a negative effect on emerging
market firms cross-border M&A long-term performance, finds support. Looking at the
accounting-based measures, Model 2 show that cultural distance affects Change in ROS
negatively on the 5% significance level. If Hofstede’s indexed dimensions change by one unit,
ceteris paribus, the negative Change in ROS will on average increase 2.9% within a period of
two years following the M&A. One potential reason for this is that emerging market firms fail
to integrate the two cultures which hinders the transfer of knowledge and strategic resources.
As discussed in section 2.4 transfer of strategic assets is a complex process which requires
extensive integration capabilities and coordination initiatives. Cultural distance has been
argued to impede the integration of cultures and limit knowledge exchange while potentially
causing interfirm conflicts. As a result, emerging markets may be especially vulnerable to the
potential integration barriers that cultural distance may pose (Li, Li and Wang, 2016).

Interestingly, no direct effect can be observed in Model 1 between cultural distance and Sales
CAGR, which could potentially be because of the nature of emerging market acquirers.

41
Since emerging markets are mainly motivated by the transfer of capabilities and knowledge,
focus lies in how to improve the business, such as profitability, instead of growing the top line
(Bertrand and Betschinger, 2012). Therefore, Sales CAGR may not be affected that much
following cross-border M&As by emerging market firms and thus lacking significant results.
In this case, change in profitability (Change in ROS) is significantly negative which is an
indication that, in general, the emerging market firms fail to realise these exchanges of
knowledge and capabilities. Hence by solely looking at Change in ROS, the results support
hypothesis 2.

The third hypothesis (H3), that cultural distance will have a stronger negative effect on the
cross-border M&A performance for emerging market firms compared to developed markets
firms, finds no statistically significant support. However, the results from both the market-based
and accounting-based models (see model 4-6) indicates hat Cultural distance has no significant
effect on performance. Therefore, one can conclude that for developed market firms Cultural
distance had either a positive or a close to zero insignificant negative effect on all performance
measures. This indicates that Cultural distance may not be a major factor that affect their
performance which is in line with previous literature that finds no significant effect of Cultural
distance (Barkema, Bell and Pennings, 1996; Ahmand et al., 2016; Markis and Ittner 1994). By
simply analysing the coefficient one could argue in line with hypothesis 3, that emerging market
firms' cross-border M&A performance is more negatively affected by Cultural distance than
developed market firms’. A potential reason for this may be that developed market firms’
greater experience may help mediate the downside effects of Cultural distance. Although the
results indicates in line with the expectations, the results are highly insignificant and thus
hypothesis 3 finds no support. Instead other factors seem to affect the cross-border M&A
performance of developed market firms.

The fourth hypothesis (H4), that cultural distance will have a less negative effect on long-term
accounting-based performance measures than on the short-term market-based performance
measures, finds no support. Contrary to the expectations, the observed Change in ROS and CAR
(-1,1) provide indications that cultural distance affects long-term performance negatively to a
greater extent than short-term performance. This is further demonstrated in the results from the
standardised models which shows that Cultural distance will have a greater effect on change in
long-term profitability than on short-term abnormal returns. Hence firms’ operational
performance in terms of profitability can possibly be assumed to be more negative than what

42
the market expects initially. This is in contrast to hypothesis 4 but in line Li et al (2020) who
finds that Cultural distance has a positive effect on short-term performance and a negative
effect on long-term performance. The authors argue that local societies are more accepting of
firms not adjusting according to the local culture immediately which can help coordination.
However, in the long-term, not understanding the local culture hinders knowledge transfer and
reduces profitability. However, one needs to be cautious when drawing any inferences since (i)
the sample differs slightly (even though both samples are deemed representative for the larger
population) and (ii) CAR (-1,1) is not statistically significant. Consequently, there does not exist
statistically significant support for hypothesis 4 and we have to suffice for mere indications.

Table 5
Hypothesis Statistically supported Yes/No*
H1 No
H2 Yes
H3 No
H4 No
Table 5 - Showing which hypothesis are statistically supported and if there is significance.
*Hypothesis that were not supported showed insignificant result and thus could neither be supported or rejected

5.2 Robustness test

From the robustness test using GLOBE’s cultural dimensions, one can identify that cultural
distance is no longer significant in model 2 (Change in ROS in the emerging market sample)
while turning significant in model 5 (Change in ROS in the developed market sample) (see
Appendix table 10). The inconsistent findings may be due to several reasons. Firstly, even
though Hofstede’s cultural dimensions and GLOBE project dimensions are similar in some
aspects, for example using similar dimensions such as uncertainty avoidance and power
distance, they differ in the assigned value for each country. In our sample this had a major effect
where the cultural distance varied significantly depending on measurement. In the GLOBE
sample, the highest cultural distance was that of Switzerland and Hungary which in the sample
using Hofstede’s dimension was in the lower bracket. These differences were identified in
several observations which had a major impact on the results. Therefore, it is not surprising that
the cultural dimensions of Hofstede and GLOBE only had a 0.12 pairwise correlation.

Another potential reason for the low correlation could be the differences in amounts of
variables. GLOBE uses nine different variables while the original framework of Hofstede only

43
uses four. The differences in the number of dimensions should reasonably affect the measures
since the frameworks capture different aspects of culture. Since this thesis applies Hofstede's
four cultural dimensions, the discrepancies could be greater than if the updated framework with
two more dimensions, which GLOBE is more similar to, would have been applied. To conclude,
the findings of this thesis are not robust to different measurements of culture which truly
highlight the complexity of conceptualising culture.

44
6 Discussion
The findings suggest that there is a difference between emerging market firms and developed
markets firms when engaging in cross-border M&A and their ability to manage the challenges
of cultural distance. Both in the long- and short term, cultural distance seems to be of greater
significance for emerging market firms than for developed market firms in determining cross-
border M&A performance. Furthermore, the effect also seems to be less negative for developed
market firms in the long-term, indicating that developed market firms are better in managing
cultural distance over time. Hence, according to the findings of this study, cultural distance is
more important to manage for emerging market firms. This may be because of the greater
integration requirements when engaging in strategic resource acquisition. A firm that depends
on knowledge and capabilities from the target firms must reasonably be able to integrate the
two firms more extensively. Since cultural distance means challenges in the integration process,
it is logical that cultural distance needs more consideration for emerging market firms. On the
contrary, developed market firms might more often acquire firms without the same demand for
extensive integration between the two firms.

Although cultural distance might be a more important factor when emerging market firms
engage in cross-border M&A, the results also indicate that the effect is mostly negative.
Meaning that they are not overcoming the challenges posed by cultural distance and hence are
unable to achieve the potential benefits of integrating the two different cultures. A possible
explanation for emerging market firms’ challenges associated with overcoming cultural
distance, which have been discussed in this thesis, is their lack of previous international M&A
experience. The findings suggest that emerging market firms should allocate more resources
towards mediating the barriers of cultural distance. This is highly relevant today where
emerging market firms are driving the growth in cross-border M&A, often into developed
markets with a high cultural distance.

The short-term performance for emerging market firms was better than their long-term
profitability effect. The results indicate that the market expects cultural distance to be value
creating which is possibly motivated by new capabilities being created as a result of intertwined
cultures. However, since the effect of cultural distance on CAR is insignificant, one can draw
the important conclusion that although cultural distance does not seem to be a significant factor
affecting performance in the short-term, it impedes operational performance in the long-term

45
for emerging market firms. These findings provide important insights for emerging market
firms who may otherwise underestimate the challenges of cultural distance due to the initial
insignificant effects which in reality may deteriorate the long-term performance of the firm.

6.1 Complexity of cultural distance and performance

The results are quite expressive for the complexity of cross-border M&A performance and
cultural distance. When analysing the results, it becomes evident that cultural distance and
cross-border M&A performance are complex matters that may prove difficult to measure.
Similarly, to Barkema, Bell and Pennings (1996), Ahmand et al., (2016), Markis and Ittner
(1994) the results are insignificant in several of the used models. There may be different reasons
for the insignificant results in some of the models. In a meta-analysis performed by Stahl and
Voight (2008), the authors present a mean effect size between cultural distance and financial
performance that is close to zero. The authors highlight that cultural distance and M&A are
complex matters and that the relationship between the two are multifaceted. A lot of different
factors intertwine within the M&A process while only a few are accounted for in this study. In
addition, depending on the sample one can find different results as described by Stahl and
Voight (2008).

Chakrabarti, Gupta-Mukherjee, Jayaraman, (2009) finds that only masculinity has a significant
effect on performance when measuring the cultural dimensions separately, However,
interestingly enough the authors find significant result of the composite measure of cultural
distance indicating that the positive impact on firm performance develops in a non-linear
fashion due to differences of the four cultural dimensions (Chakrabarti, Gupta-Mukherjee,
Jayaraman, 2009). This further adds to the question whether or not the current research truly
captures the effects of cultural distance and cross-border M&A performance. Overall, our
results provide some insights to how cultural distance affects emerging market firms while also
emphasising the complex nature of the subject. Lastly, this study uses different samples
depending on whether the firms are from emerging markets or developed markets and for
accounting- and market-based measures. Given the differences between developed market
firms and emerging market firms this division between samples could possibly be contributing
to the inconsistencies. However, given the limited amount of data, using two sets of samples
was deemed necessary in order to not lose too many observations.

46
7 Conclusion
7.1 Concluding remarks
Although emerging markets firms are becoming increasingly active on the global cross-border
M&A stage, only a fraction of the studies about cultural distance and cross-border M&A
performance are conducted on emerging market firms. However, emerging market firms differ
in two central aspects that can affect the relationship between cultural distance and cross-border
M&A performance, namely the motives for engaging in cross-border M&A and previous M&A
experience. Therefore, the main purpose with this thesis was to examine how cultural distance
affects cross-border M&A performance of emerging market firms.

This study adds to the previous literature by using a multi-measurement approach, using a
broader sample of emerging countries and comparing the effects to those of developed market
firms. Performance is defined as cumulative abnormal returns, sales growth and change in
profitability while culture is measured as Hofstede’s cultural dimensions. Using a multiple
regression analysis this study finds that cultural distance affects the change in profitability
negatively for emerging market firms. The negative relationship between cultural distance and
change in profitability indicates that emerging market firms experience a negative long-term
performance due to cultural distances considering all else equal. The theory suggests that this
could be because of the impeding effect that culture may have on integration which in turn is
considered necessary for synergy realisation and enhanced performance. Interestingly enough,
developed market firms’ cross-border M&A performance seemed to be unaffected by the
cultural distance. This could be because of the differences in previous experience and motives,
where emerging market firms in general have less cross-border M&A experience while
simultaneously seeking strategic resources which require extensive integration capabilities.

Lastly, cultural distance seems to matter more in the long-term since a significant effect could
be observed while the effect on short-term performance were insignificant. That the negative
effects of cultural distance are more prominent in the long-term is in accordance with Li et al
(2020). This also indicates that emerging market firms fail to realise the enhanced performance
that the market expects to emerge following the cross-border M&A.

47
7.2 Limitations and future research
There are a number of limitations in this study that may prove important opportunities for future
research. Firstly, due to the nature of this study which required stock prices, only public
companies were included which could affect the generalisability of the results since public
companies may differ from private ones in a range of aspects. Secondly, the sample is fairly
small in relation to the population which could also affect the generalisability of the results.
Thirdly, this study measures cultural distance impact on performance for both developed market
firms and emerging market firms. However, deal direction is not taken into consideration due
to few identified observations where emerging market firms acquired targets in other emerging
markets. Since market potential and economic condition could affect the performance of cross-
border M&A it would be interesting to look at the deal direction to identify whether the location
(emerging vs developed) of the target matter for emerging market firms’ cross-border M&A
performance. Since emerging market firms are increasingly participating in cross-border
M&As there will be ample opportunities to conduct studies with a larger sample.

Compared to a lot of previous studies that use one or two emerging markets, often China and
India, this study used 23 different countries to determine the general impact of cultural distance
on cross border M&A performance. Even if this enhances the generalisability of the study one
still needs to be aware about inter-country differences in this sample which could affect the
importance of cultural distance. Therefore, these results should be cautiously interpreted when
applying them on individual emerging market cases. Note also that Chinese firms constitute a
large portion of the sample and is perhaps not representable for the rest of the group.

There are other variables that could play an important role for cross-border M&A performance
that this study has not controlled for. Previous studies have sometimes included and controlled
for additional or other variables which this study have not been able to consider such as payment
method and ownership status. Studies have shown that cash financed deals in general led to
positive performance while deals financed with stocks led to negative performance measured
as abnormal returns (Martynova and Renneboog, 2008; Mann and Kohli, 2009). Studies
performed on emerging market firms have also in some cases considered the ownership status
of the acquirer and included a variable to control for the firm being state-owned or not. This is
the case with many Chinese firms in particular as the Chinese government still controls
significant financial and industrial resources (Nicholson & Salaber, 2013). As these firms often

48
are of greater size and have more stable operations than non state-owned firms, they engage in
foreign investments more frequently and are more likely to perform successful overseas M&As
(Wang, Hong, Kafouros, & Boateng, 2012; Nicholson & Salaber, 2013). This study assumes
that developed market firms are more experienced than emerging market firms in general which
is in accordance with previous literature. However, given the increasing number of cross-border
M&A by emerging market firms it would be interesting for future research to study the
mediating effect of experience such as the number of previous completed M&A deals.

Lastly, looking at the results of the original models and the robustness test, it is clear that
cultural distance and cross-border M&A performance are a complex phenomenon. The
relationship between cross-border M&A performance and cultural distance seems to be
susceptible for changes in the measurement of culture. It would be interesting to see if this is
only the case for our study or if it is widespread across the literature. To gain a better
understanding of the potential discrepancies within the literature it would be interesting to
perform a meta-analysis similar to Stahl and Voight (2008) but in an emerging market context.
Should there be systematic differences in the relationship between performance and cultural
distance depending on the measurement, there might be a need to re-examine and possibly
develop the measurements further.

49
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 Appendix
Table 6 Data samples overview

# Deals # Deals
(Accounting- # Deals Developed (Accounting- # Deals
Emerging acquirers based) (Market-based) acquirers based) (Market-based)
Brazil 2 2 Australia 25 21
Chile 3 3 Austria 10 8
China (Mainland) 24 21 Belgium 11 11
Colombia 3 1 Canada 45 36
Czech Republic 1 1 Denmark 11 12
Egypt 2 2 Finland 15 17
Greece 4 1 France 91 79
Hungary 4 3 Germany 75 66
India 14 12 Hong Kong 18 16
Indonesia 3 3 Ireland 12 10
Malaysia 8 7 Israel 9 5
Mexico 7 3 Italy 17 15
Philippines 2 2 Japan 63 52
Poland 5 4 Netherlands 41 29
Qatar 6 6 New Zealand 4 4
Russia 2 2 Norway 14 13
Saudi Arabia 3 3 Portugal 1 1
South Africa 10 7 Singapore 16 15
South Korea 8 9 Spain 16 14
Taiwan 8 8 Sweden 44 39
Turkey 1 0 Switzerland 62 51
Thailand 3 2 United Kingdom 105 92
United Arab Emirates 2 1 United States 132 109
Total 125 103 837 715

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Table 7 List of indices used in the event study
Country Index
United States DOW JONES INDUSTRIALS - PRICE INDEX
Spain IBEX 35 - PRICE INDEX
Italy FTSE MIB INDEX - PRICE INDEX
Germany DAX 30 PERFORMANCE - PRICE INDEX
France FRANCE CAC 40 - PRICE INDEX
United Kingdom FTSE 100 - PRICE INDEX
Belgium BEL 20 - PRICE INDEX
Switzerland SWISS MARKET (SMI) - PRICE INDEX
Netherlands AEX INDEX (AEX) - PRICE INDEX
Canada S&P/TSX COMPOSITE INDEX - PRICE INDEX
Portugal PORTUGAL PSI-20 - PRICE INDEX
Austria ATX - AUSTRIAN TRADED INDEX - PRICE INDEX
Israel TEL AVIV SE TA-35 - PRICE INDEX
Sweden OMX STOCKHOLM 30 (OMXS30) - PRICE INDEX
Ireland ISEQ ALL SHARE INDEX - PRICE INDEX
Norway MSCI NORWAY - PRICE INDEX
Australia S&P/ASX 200 - PRICE INDEX
Denmark OMX COPENHAGEN (OMXC) - PRICE INDEX
Japan NIKKEI 225 STOCK AVERAGE - PRICE INDEX
Finland OMX HELSINKI (OMXH) - PRICE INDEX
Singapore STRAITS TIMES INDEX L - PRICE INDEX
Hong Kong HANG SENG - PRICE INDEX
New Zeeland S&P/NZX 50 - PRICE INDEX
China (mainland) SHANGHAI SE A SHARE - PRICE INDEX
Turkey BIST NATIONAL 100 - PRICE INDEX
Brazil MSCI BRAZIL - PRICE INDEX
South Korea KOREA SE COMPOSITE (KOSPI) - PRICE INDEX
Russia MOEX RUSSIA INDEX - PRICE INDEX
India S&P BSE (SENSEX) 30 SENSITIVE - PRICE INDEX
Chile S&P/CLX IGPA CLP INDEX - PRICE INDEX
Poland MSCI POLAND - PRICE INDEX
Czech Republic PRAGUE SE PX - PRICE INDEX
Peru S&P/BVL GENERAL(IGBVL) - PRICE INDEX
Pakistan KARACHI SE 100 - PRICE INDEX
Malaysia FTSE BURSA MALAYSIA KLCI - PRICE INDEX
Philippines PHILIPPINE SE I(PSEi) - PRICE INDEX
Mexiko MEXICO IPC (BOLSA) - PRICE INDEX
Indonesia IDX COMPOSITE - PRICE INDEX
Saudi Arabia SAUDI TADAWUL ALL SHARE (TASI) - PRICE INDEX
United Arab Emirates ADX GENERAL - PRICE INDEX
Thailand BANGKOK S.E.T. - PRICE INDEX
Qatar MSCI QATAR - PRICE INDEX
Colombia MSCI COLOMBIA - PRICE INDEX
Greece ATHEX COMPOSITE - PRICE INDEX
South Africa FTSE/JSE ALL SHARE - PRICE INDEX
Argentina S&P MERVAL INDEX - PRICE INDEX
Egypt EGYPT EGX 30 - PRICE INDEX
Hungary BUDAPEST (BUX) - PRICE INDEX
Taiwan TAIWAN SE WEIGHED TAIEX - PRICE INDEX

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 Table 8 VIF-values for independent variables
VIF Acounting-based Market-based
Variable Emerging Developed Emerging Developed
Cultural Distance 1,057 1,051 1,097 1,045
Level of control 1,043 1,040 1,042 1,042
Acquirer size 1,954 2,036 2,338 1,941
Target size 1,616 1,633 1,653 1,535
Relative firm size 1,843 1,793 2,442 1,611
Acquirer ROA prior 1,166 1,083 1,464 1,083
Industry relatedness 1,063 1,017 1,062 1,022

Table 9 Regression model with standardised dependent variables

Emerging Developed
Model 7 Model 8 Model 9 Model 10 Model 11 Model 12
Sales CAGR Change in ROS CAR (-1,1) Sales CAGR Change in ROS CAR (-1,1)
Cultural Distance 0,046 -0,183** 0,130 -0,001 -0,002 0,015
(0,072) (0,089) (0,083) (0,017) (0,022) (0,026)
P-value 0,524 0,042 0,121 0,938 0,934 0,571
Level of control 0,365 -0,523* 0,602 0,098 0,113 -0,042
(0,302) (0,288) (0,429) (0,080) (0,091) (0,103)
P-value 0,229 0,072 0,165 0,220 0,214 0,681
Acquirer size 0,018 0,048 -0,124 -0,100*** 0,087** 0,025
(0,094) (0,061) (0,097) (0,025) (0,042) (0,026)
P-value 0,849 0,441 0,205 0,000 0,038 0,335
Target size -0,080 0,098* -0,065 -0,005 0,010 0,005
(0,063) (0,052) (0,061) (0,021) (0,025) (0,023)
P-value 0,211 0,061 0,288 0,823 0,680 0,817
Relative firm size 0,078 -0,220** 0,174 0,769*** -0,116 -0,008
(0,231) (0,088) (0,171) (0,174) (0,147) (0,074)
P-value 0,735 0,015 0,313 0,000 0,432 0,916
Acquirer ROA prior 4,230** -6,288*** 2,200 1,158* 0,512 -0,502
(1,793) (1,930) (1,958) (0,618) (0,870) (0,591)
P-value 0,020 0,002 0,265 0,061 0,557 0,397
Industry relatedness -0,304 0,231 -0,055 0,124** 0,022 0,011
(0,231) (0,176) (0,255) (0,052) (0,069) (0,079)
P-value 0,192 0,192 0,828 0,017 0,754 0,892

N 125 125 103 837 837 715

R-sq 0,337 0,488 0,366 0,437 0,110 0,058
Fixed year effects Y Y Y Y Y Y
Fixed industry effects Y Y Y Y Y Y
Robust standard errors are presented in the parenthesis. *- shows a significance of 10%, ** - significance of 5% and ***-
significance of 1%

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 Table 10 Robustness test with cultural distance calculated from Globes’ cultural
dimensions

Emerging Developed
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Sales CAGR ROS Change CAR -1,1 Sales CAGR ROS Change CAR -1,1
Globe CD 0,028 0,012 -0,004 -0,002 0,012** -0,001
(0,028) (0,025) (0,008) (0,009) (0,005) (0,002)
P-value 0,330 0,639 0,605 0,862 0,018 0,740
Level of control 0,091 -0,073* 0,024 0,035 0,019 -0,003
(0,077) (0,043) (0,023) (0,029) (0,018) (0,005)
P-value 0,241 0,094 0,311 0,224 0,291 0,532
Acquirer size 0,012* 0,000 -0,006 -0,033*** 0,013 0,002
(0,021) (0,012) (0,005) (0,008) (0,008) (0,001)
P-value 0,056 0,992 0,233 0,000 0,124 0,193
Target size -0,026* 0,013* -0,002 0,001 0,005 0,000
(0,016) (0,008) (0,003) (0,007) (0,005) (0,001)
P-value 0,099 0,099 0,458 0,916 0,349 0,875
Relative firm size 0,044 -0,040** 0,010 0,249*** -0,027 -0,005
(0,039) (0,017) (0,008) (0,058) (0,029) (0,004)
P-value 0,266 0,018 0,214 0,000 0,354 0,886
Acquirer ROA prior 0,865** -0,506 0,092 0,392* 0,143 -0,026
(0,381) (0,332) (0,080) (0,206) (0,175) (0,030)
P-value 0,026 0,132 0,255 0,058 0,412 0,378
Industry relatedness -0,092 0,043 -0,003 0,035** 0,012 0,000
(0,057) (0,036) (0,015) (0,018) (0,014) (0,004)
P-value 0,111 0,231 0,863 0,050 0,400 0,929

N 101 101 83 774 774 659

R-sq 0,393 0,382 0,349 0,435 0,112 0,067
Fixed year effects Y Y Y Y Y Y
Fixed industry effects Y Y Y Y Y Y
Robust standard errors are presented in the parenthesis. *- shows a significance of 10%, ** - significance of 5% and ***-
significance of 1%

63