Do innovative emerging market cross-border acquirers create more shareholder value? Evidence from India

• There is a U-shaped relationship between R&D intensity of Indian acquirers and shareholder value creation.
• Firms with extensive research capacity create most shareholder value from acquisitions.
• High-tech acquisitions lead to a higher shareholder value regardless of research intensity.
• Horizontal acquisitions realize more shareholder value for standalone firms.
• Horizontal acquisitions lead to a lower market response for business group affiliated companies.

This study attempts to investigate the role of absorptive capacity of emerging market firms in creating shareholder value from developed market acquisitions. It analyzes the cumulative abnormal return of cross border acquisitions of listed Indian firms in Europe focusing on acquirers’ research intensity. The study discovers a U-shaped relationship between research intensity of Indian acquirers and their cumulative abnormal return following acquisitions in Europe. As such, firms with no research capacity can benefit from the acquisition by accessing advanced targets, although firms with extensive research capacity outperform any of their Indian competitors as these firms have the absorptive capacity to not only exploit but also explore the knowledge base of the acquired target. Furthermore, we found a positive effect of the acquisition of a high-tech target company, regardless of the absorptive capacity of the acquirer. We also found that business group membership has a positive impact on shareholder value, although horizontal acquisitions as compared to vertical and unrelated deals have a significantly negative impact for these companies. This result is again linked to the more explorative nature of vertical and unrelated acquisitions in comparison with horizontal deals that are more based on the exploitation of existing resources and capabilities.