Board participation, toeholds and the cross-border effect

Research shows that the bid announcement return (BAR) of the acquiring firm is lower for cross-border than domestic acquisition announcements. The current lack of economically based explanations for this effect, labeled the cross-border effect by Moeller and Schlingemann (2005), motivates our study. We use unique hand-collected corporate governance data to study how the relationships between acquiring and target firms prior to a bid announcement affect the cross-border effect. Our tests show that non-operating associations between the acquiring and target firms, in the form of board participation and toeholds, have a positive effect on the BAR. The cross-border effect disappears when we control for board participation and toeholds. Thus, we suggest that the cross-border effect is at least partly a consequence of information asymmetries and the adverse selection problem that they generate.

► Announcement returns are lower for cross-border than domestic acquisitions.
► In the M&A literature, this underperformance is called a cross-border effect.
► We study bid return differences between cross-border and domestic acquisitions.
► Acquirers sitting on the target firm's board and with toeholds earn higher returns.
► The cross-border effect is explained by foreign acquirers being outsiders.