Econometrics Seminar - Jackie Chan (Chinese University of Hong Kong)

Title: "Network Learning Effects in Cross-border Mergers and Acquisitions” (with Chih-Sheng Hsieh)

Abstract: In this paper, we study the impact of learning in foreign markets on firms' entry decision into new destinations. We propose local knowledge spillovers within spatial networks in third countries (i.e., prior destinations) as a channel through which firms learn about their destination of interest. In the context of cross-border mergers and acquisitions (M&A), acquirers obtain knowledge on new destinations through their third-country targets from the neighborhood learning effect. We present a heterogeneous-firm model of cross-border M&A with learning. Firms sort as acquirers, non-participants of M&A, and targets. Expected profits and the probability of entry into a destination increase with acquirers' accumulated experience abroad and the strength of signals observed from their third-country targets. Using data on global cross-border M&A activity from 1995 to 2016, we find strong empirical support for the model at both the macro and micro levels. In particular, at the micro level, we examine over 2,800 non-US acquirers that invested in the US and subsequently in non-US foreign destinations. Controlling for accumulated experience in other third countries, we find that the cross-border M&A activity (purchases and sales) of the US targets' neighbors has a positive impact on the destination choice of the non-US acquirers. Moreover, learning effects are complementary across firms' sources of information.