The following proposal has been written with the aim of introducing my research question and structure for my final dissertation, it will begin with my motivation for the topic, followed by reviewing existing literature and focusing on the impact variables I will be investigating have had in previous research and then describing the sources for my data and methodology. In the final dissertation, I will also present my empirical findings and suggest how my research could be expanded into future research on the topic.
My aim is to research to what point macroeconomic factors explain Mergers & Acquisitions (M&A) in the 38 countries in my panel across the time period from 1996 to 2018, and how much it leaves unexplained by non-macroeconomic factors like by firm level (e.g.Vasconcellos & Kish, 1996), trade agreements and cultural factors (e.g. Coeurdacier et al., 2009), among others. I will aim to conclude that macroeconomic factors are the main determinant of M&A in my sample, but I also aim to investigate if my model fits the data of all the countries in my panel and across the whole time period or has there have been structural changes across time or across countries affecting the determinants of M&A.
M&A is a big component of the global economy, with multinational companies aiming to expand into new geographical markets or into new product markets every day. Global M&A is a huge market, with $4.1 trillion worth of deals completed in just 2018, and with world GDP being $86 trillion, global M&A is worth 5% of the world’s GDP which is the equivalent of Germany’s or Japan’s GDP.
My personal motivation for this research question comes from my previous two internships, where I was working in Mergers & Acquisitions (M&A) in China and Brazil. I found it very surprising that even though many Latin American economies have experienced severe political troubles or economic recessions, M&A has still been booming. Let’s take the case of Brazil for example, in the 2015 Year on Year (YoY) economic growth was -2.2% while the M&A volume that year increased by 20%. Then looking at China, YoY economic growth has steadily been slowing down since 2010 from +12% to only +6% this year but M&A volume has increased by 70% in the same period. There have been numerous similar other cases in the world, but I wanted to focus on these two in particular. In this dissertation I will investigate if these macroeconomic factors actually do determine M&A like previous studies have concluded, and if so, does my model fit some countries or years in my panel better than others?
Numerous pieces of research have been done in the past on this topic, but this topic is still very under-researched in the cross-country setting. A key distinction has to be made between “new” and “old” literature, and by “old” I’m referring to the literature prior to 2000 which investigated the determinants of M&A prior to the M&A boom in the late 1990s. While my empirical analysis will focus on data after the boom but I also want to investigate if my results agree with the results of “old” literature. This type of literature includes papers like Markham (1955) which looked at how economic fluctuations impacted merger activity between 1914 and 1941 in the United States and concluded that this relationship is only weakly supported by data but on the other hand, industrial production and the stock market showed a strong positive correlation. Melicher, Ledolter, and D'Antonio (1983) used a time series method to investigate the effect on the United States from 1947 to 1977 and also concluded that economic conditions only have a weak relationship with merger activity and confirmed the result of the previous research by showing that stock market had a significant positive relationship.
In terms of “new” literature, Wang (2008) investigated how Chinese macroeconomic variables like GDP and exchange rate affected M&A performance in China from 1995 to 2006. I will use a similar method with similar independent variables but on a cross-country level for various emerging and developed countries to investigate if the same macroeconomic variables that determine M&A in China also determine M&A in a cross-country setting. It is surprising how the stock market and economic freedom appeared to be insignificant in Chinese M&A, as this contradicts previous research, so I’m also going to investigate if these have an impact on M&A in other countries or not.
Rossi and Volpin (2004) then investigated the effect of investor protection on M&A between 1990 and 2002 in 49 countries. Investor protection served as a proxy for a range of factors developed by La Porta et al. (1998) such as quality of accounting standards and shareholder protection among others. The research also included factors to control for changes in economic conditions and it concluded that better investor protection is associated with a higher volume of M&A deals but interestingly, GDP growth appeared as insignificant in their first models and in subsequent models where significant, it showed a negative effect and GNP per capita, however, was highly significant and shows a positive effect.
Vasconcellos and Kish (1996) also conducted similar research but on specific cross-border M&A between the US and Canada for 1982-1990 where they researched the effect of macroeconomic factors and concluded that the cost of debt financing and the difference between the two countries was highly significant while other factors like the stock market and exchange rate were statistically insignificant. They also concluded that a large proportion was explained by non-macroeconomic factors like industry or firm-level factors, due to the fact that their original model had an adjusted R2 of only 10.9%.
There are numerous other research papers on different country settings and variables, the most interesting ones being Feld et al. (2016) showing a positive effect of capital gains tax on M&A in a cross-country setting, and Coeurdacier et al. (2009) showing a positive effect between having a common language and common border on cross-border M&A while contradicting numerous previous papers and the gravity equation by showing that in the EU geographical distance is insignificant.
Data and Sources
For my econometric regression model, I will be constructing a new database using annual M&A deal volume data which spans 38 countries (20 emerging and 18 developed) from the Institute for Mergers, Acquisitions, and Alliances (IMAA) and the data set ranges from 1985 to 2018 for some countries, but I chose to investigate the 1996 to 2018 period due to the availability of data for all the countries with a significant volume of M&A in that time period. A table summary of all the countries along with their type classification and their M&A volume ranges can be found in Appendix 2. My analysis will focus on the volume (number) of M&A deals, as has been done in previous research, due to simplicity, as this allows direct comparisons between 1996 and 2018 without having to take into account changes in the value of money and I will be excluding the United States from my analysis as the exchange rate variable is presented in terms of US dollars.