DOI QR코드

DOI QR Code

The Moderating Effect of Internal Control on Performance of Cross-Border M&A under the Uncertainty of Economic Policy: Evidence from China

  • Huang, Xiao-Lin (School of Management, Minzu University of China) ;
  • Chen, Guan-Ting (School of Economics and Management, Tsinghua University) ;
  • Lee, Eun-Hye (Graduate School of Technology Management, Kyung Hee University)
  • Received : 2019.09.20
  • Accepted : 2019.11.20
  • Published : 2019.11.30

Abstract

Purpose - The purpose of this paper is to investigate the relationship between internal control, economic policy uncertainty, and performance of cross-border merger and acquisition (M&A) based on the panel data of Chinese listed firms. The authors expected that internal control has a positive moderating effect on the performance of cross-border M&A and that it mainly occurs during periods when economic policies are relatively stable. In addition, the authors tried to find out the mechanism of internal control affecting cross-border M&A and the corporate performance. Design/methodology - The authors tested the hypotheses by a multivariate regression model based on the panel data of Chinese listed firms from 2009 to 2017. The dependent variable is the change value of business performance (DROA_1,2,3) and the explanatory variables are cross-border M&A (MA), China's uncertainty of economic policy (EPU), and internal control level (IC) respectively. Findings - The authors find that internal control has a positive moderating effect on the relationship between cross-border M&A and corporate performance. Further, the authors find that the moderating effect is more significant in state-owned enterprises and that it mainly occurs during periods when economic policies are relatively stable. Originality/value - This paper is the leading study that tries to analyze empirically the relationship between internal control, economic policy uncertainty, and performance of cross-border M&A. It provides a new avenue through which internal control might reasonably mitigate the risks of cross-border M&A and correspondingly improve the performance of cross-border M&A. It also confirms the moderating effect of internal control on the performance of cross-border M&A under the uncertainty of economic policy.

Keywords

Acknowledgement

This work was supported by the Beijing Natural Science Foundation (9192017), the National Natural Science Foundation of China (71372047) and Beijing Philosophy and Social Science Foundation (13JGB010).

References

  1. Ahern, K. R., D. Daminelli and C. Fracassi (2015), "Lost in Translation? the Effect of Cultural Values on Mergers Around the World", Journal of Financial Economics, 117(1), 165-189. https://doi.org/10.1016/j.jfineco.2012.08.006
  2. Albuquerque, R., L. Brandao-Marques, M. A. Ferreira and P. Matos (2018), "International Corporate Governance Spillovers: Evidence from Cross-Border Mergers and Acquisitions", Review of Financial Studies, 32(2), 738-770.
  3. Ashbaugh-Skaife, H, D. W. Collins Jr. Kinney, R. William and R. LaFond (2008), "The Effect of SOX Internal Control Deficiencies and Their Remediation on Accrual Quality", The Accounting Review, 83(1), 217-250. https://doi.org/10.2308/accr.2008.83.1.217
  4. Ashbaugh-Skaife, H., D. W. Collins, W. R. Kinney Jr and R. LaFond (2009), "The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity", Journal of Accounting Research, 47(1), 1-43 https://doi.org/10.1111/j.1475-679X.2008.00315.x
  5. Atanassov, J., B. Julio and T. C. Leng (2016), The Bright Side of Political Uncertainty: The Case of R&D (SSRN Database), 1-51. Available from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2693605
  6. Barkema, H. G., J. H. J. Bell and J. M. Pennings (1996), "Foreign Entry, Cultural Barriers, and Learning", Strategic Management Journal, 17(2), 151-166. https://doi.org/10.1002/(SICI)1097-0266(199602)17:2<151::AID-SMJ799>3.0.CO;2-Z
  7. Baker, S. R., N. Bloomand and S. J. Davis (2016), "Measuring Economic Policy Uncertainty", Quarterly Journal of Economics, 131(4), 1593-1636. https://doi.org/10.1093/qje/qjw024
  8. Bedard, J. C., R. Hoitash, U. Hoitash and K. Westermann (2012), "Material Weakness Remediation and Earnings Quality: A Detailed Examination by Type of Control Deficiency", Auditing: A Journal of Practice &Theory, 31(1), 57-78. https://doi.org/10.2308/ajpt-10190
  9. Bonaime, A., H. Gulen and M. Ion (2018), "Does Policy Uncertainty Affect Mergers and Acquisitions?", Journal of Financial Economics, 129(3), 531-558. https://doi.org/10.1016/j.jfineco.2018.05.007
  10. Bris, A. and C. Cabolis (2008), "The Value of Investor Protection: Firm Evidence from Cross-Border Mergers", Review of Financial Studies, 21 (2), 605-648. https://doi.org/10.1093/rfs/hhm089
  11. Aybar, B. and A. Ficici (2009), "Cross-Border Acquisitions and Firm Value: An Analysis of Emerging-Market Multinationals", Journal of International Business Studies, 40(8), 1317-1338. https://doi.org/10.1057/jibs.2009.15
  12. Bertrand, O. and M. A. Betschinger (2012), "Performance of Domestic and Cross-Border Acquisitions: Empirical Evidence from Russian Acquirers", Journal of Comparative Economics, 40(3), 413-437. https://doi.org/10.1016/j.jce.2011.11.003
  13. Cai, Y. and M. Sevilir (2012), "Board Connections and M&A Transactions", Journal of Financial Economic, 103(2), 327-349. https://doi.org/10.1016/j.jfineco.2011.05.017
  14. Cao, C., X. Y. Li and G. L. Liu (2017), "Political Uncertainty and Cross-Border Acquisitions", Review of Finance, 23(2), 439-470.
  15. Chakrabarti, R., S. Gupta-Mukherjee and N. Jayaraman (2009), "Mars-Venus Marriages: Culture and Cross-Border M&A", Journal of International Business Studies, 40(2), 216-237. https://doi.org/10.1057/jibs.2008.58
  16. Cheng, M., D. Dhaliwal and Y. Zhang (2013), "Does Investment Efficiency Improve After the Disclosure of Material Weaknesses in Internal Control over Financial Reporting?", Journal of Accounting and Economics, 56 (1), 1-18. https://doi.org/10.1016/j.jacceco.2013.03.001
  17. Cheng, Q., B. W. Goh and J. B. Kim (2018), "Internal Control and Operational Efficiency", Contemporary Accounting Research, 35(2), 1102-1139. https://doi.org/10.1111/1911-3846.12409
  18. Chen, Z. H., M. Cihan and C. Jens (2016), Political Uncertainty and Firm Investment: Project-Level Evidence from M&A Activity (Working Paper), New Orleans, LA : Tulane University, 1-52.
  19. Conn, R. L., A. Cosh, P. M. Guest and A. Hughes (2005), "The Impact on U.K. Acquirers of Domestic, Cross-Border, Public and Private Acquisitions", Journal of Business Finance &Accounting, 32(5-6), 815-870. https://doi.org/10.1111/j.0306-686x.2005.00615.x
  20. Desai, M. A., C. F. Foley and J. R. Hines Jr (2004), "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets", Journal of Finance, 59(6), 2451-2487. https://doi.org/10.1111/j.1540-6261.2004.00706.x
  21. Desai, M. A., C. F. Foley and J. R. Hines Jr (2008), "Capital Structure with Risky Foreign Investment", Journal of Financial Economics, 88(3), 534-553. https://doi.org/10.1016/j.jfineco.2007.05.002
  22. Dhaliwal, D., C. Hogan, R. Trezevant and M. Wilkins (2011), "Internal Control Disclosures, Monitoring, and the Cost of Debt", The Accounting Review, 86(4), 1131-1156. https://doi.org/10.2308/accr-10043
  23. Dutta, D. K., S. Malhotra and P. C. Zhu (2016), "Internationalization Process, Impact of Slack Resources, and Role of the CEO: The Duality of Structure and Agency in Evolution of Cross-Border Acquisition Decisions", Journal of World Business, 51(2), 212-225. https://doi.org/10.1016/j.jwb.2015.07.001
  24. Erel, I., R. C. Liao and M. S. Weisbach (2012), "Determinants of Cross-Border Mergers and Acquisitions", The Journal of Finance, 67(3), 1045-1082. https://doi.org/10.1111/j.1540-6261.2012.01741.x
  25. Feng, M., C. Li, S. E. McVay and H. Skaife (2015), "Does Ineffective Internal Control over Financial Reporting Affect A Firm's Operations? Evidence from firms' inventory management", The Accounting Review, 90(2), 529-557. https://doi.org/10.2308/accr-50909
  26. Francis, B. B., I. Hasan and Y. Zhu (2014), "Political Uncertainty and Bank Loan Contracting", Journal of Empirical Finance, 29, 281-286. https://doi.org/10.1016/j.jempfin.2014.08.004
  27. Geppert, M., C. Dorrenbacher, J. Gammelgaard and I. Taplin (2013), "Managerial Risktaking in International Acquisitions in the Brewery Industry: Institutional and Ownership Influences Compared", British Journal of Management, 24(3), 316-332. https://doi.org/10.1111/j.1467-8551.2011.00806.x
  28. Ge, W. and S. McVay (2005), "The Disclosure of Material Weaknesses in Internal Control After the Sarbanes-Oxley Act", Accounting Horizons, 19(3), 137-158. https://doi.org/10.2308/acch.2005.19.3.137
  29. Gulen, H. and M. Ion (2016), "Policy Uncertainty and Corporate Investment", Review of Financial Studies, 29(3), 523-564. https://doi.org/10.1093/rfs/hhv050
  30. Huang, X. L. and G. T. Chen (2017), "Internal Control and Corporate Performance: Industry Clustering Analysis and An Empirical Test Based on Chinese Listed Companies", Journal of East China Normal University (Humanities and Social Sciences), (2), 173-185.
  31. Jens, C. E. (2017), "Political Uncertainty and Investment: Causal Evidence from U.S. Gubernatorial Elections", Journal of Financial Economics, 124(3), 563-579. https://doi.org/10.1016/j.jfineco.2016.01.034
  32. Lim, J, A. K. Makhija and O. Shenkar (2016), "The Asymmetric Relationship between National Cultural Distance and Target Premiums in Cross-Border M&A", Journal of Corporate Finance, 41, 542-571. https://doi.org/10.1016/j.jcorpfin.2016.07.007
  33. Julio, B. and Y. Yook (2012), "Political Uncertainty and Corporate Investment Cycles", Journal of Finance, 67(1), 45-84. https://doi.org/10.1111/j.1540-6261.2011.01707.x
  34. Julio, B. and Y. Yook (2016), "Policy Uncertainty, Irreversibility, and Cross-Border Flows of Capital", Journal of International Economics, 103(48), 13-26. https://doi.org/10.1016/j.jinteco.2016.08.004
  35. Kurt, R. R., P. J. Sobel, U. L. Anderson, M. J. Head, S. Ramamoorti, M. Salamasick and C. Riddle (2013), Internal Auditing: Assurance &Advisory Services (3rd ed.), Altanmonte Springs, FL: The Institute of Internal Auditors Research Foundation.
  36. Liao, L., G. T. Chen and D. J. Zheng (2019), "Corporate Social Responsibility and Financial Fraud: Evidence from China", Accounting and Finance, 59(5), 3133-3169. https://doi.org/10.1111/acfi.12572
  37. Liou, R. S. and R. Rao-Nicholson (2019), "Age Matters: The Contingency of Economic Distance and Economic Freedom in Emerging Market Firm's Cross-Border M&A Performance", Management International Review, 59, 355-386. https://doi.org/10.1007/s11575-019-00381-y
  38. Liu, Y. and Y. Wang (2013), "Performance of Mergers and Acquisitions Under Corporate Governance Perspective", Open Journal of Social Sciences, 1(7), 17-25. https://doi.org/10.4236/jss.2013.17004
  39. Lu, Z. F., J. G. Zhu and W. N. Zhang (2012) "Bank Discrimination, Holding Bank Ownership, and Economic Consequence: Evidence from China", Journal of Banking and Finance, 36(2) , 341-354. https://doi.org/10.1016/j.jbankfin.2011.07.012
  40. Martynova, M. and L. Renneboog (2008), "Spillover of Corporate Governance Standards in Cross-Border Mergers and Acquisitions", Journal of Corporate Finance, 14(3), 200-223. https://doi.org/10.1016/j.jcorpfin.2008.03.004
  41. Moeller, S. B., F. P. Schlingemann and R. M. Stulz (2005), "Wealth Destruction on a Massive Scale? A Study of Acquiring-Firm Returns in the Recent Merger Wave", The Journal of Finance, 60(2), 757-782 https://doi.org/10.1111/j.1540-6261.2005.00745.x
  42. Mukherji, A., J. Mukherji, C. Dibrell and J. D. Francis (2013), "Overbidding in Cross-Border Acquisitions: Misperceptions in Assessing and Valuing Knowledge", Journal of World Business, 48(1), 39-46. https://doi.org/10.1016/j.jwb.2012.06.005
  43. Ogneva, M., K. R. Subramanyam and K. Raghunandan (2007), "Internal Control Weakness and Cost of Equity Evidence from SOX Section 404 Disclosures", The Accounting Review, 82(5), 1255-1297. https://doi.org/10.2308/accr.2007.82.5.1255
  44. Pastor, L. and P. Veronesi (2012), "Uncertainty About Government Policy and Stock Prices", Journal of Finance, 67(4), 1219-1264. https://doi.org/10.1111/j.1540-6261.2012.01746.x
  45. Quan, X. F., S. N. Wu and H. Y. Yin (2015), "Corporate Social Responsibility and Stock Price Crash Risk: Self-Interest Tool or Value Strategy?", Economic Research Journal, (11), 49-64.
  46. Rani, N., S. S. Yadav and P. K. Jain (2014), "Impact of Corporate Governance Score on Abnormal Returns and Financial Performance of Mergers and Acquisitions", Decision, 41(4), 371-398. https://doi.org/10.1007/s40622-014-0067-8
  47. Rossi, S. and P. F. Volpin (2004), "Cross-Country Determinants of Mergers and Acquisitions", Journal of Financial Economics, 74(2), 277-304. https://doi.org/10.1016/j.jfineco.2003.10.001
  48. Shimizu, K., M. A. Hitt, D. Vaidyanath and V. Pisano (2004), "Theoretical Foundations of Cross-Border Mergers and Acquisitions: A Review of Current Research and Recommendations for the Future", Journal of International Management, 10(3), 307-353. https://doi.org/10.1016/j.intman.2004.05.005
  49. Stiebale, J. and M. Trax (2011), "The Effects of Cross-Border M&As on the Acquirers' Domestic Performance: Firm-Level Evidence", Canadian Journal of Economics, 44(3), 957-990. https://doi.org/10.1111/j.1540-5982.2011.01662.x
  50. Steigner, T. and N. K. Sutton (2011), "How Does National Culture Impact Internalization Benefits in Cross-Border Mergers and Acquisitions?", The Financial Review, 46(1), 103-125. https://doi.org/10.1111/j.1540-6288.2010.00292.x
  51. Surbhi, B. and S. Vij (2018), "The Interface of Corporate Governance with M&A: Research Themes", The IUP Journal of Business Strategy, 15 (3), 19-38.
  52. The Discussion Group of Research on Internal Control Index of China Public Company (2011), "Research on Internal Control Index of China Public Company", Accounting Review, (11), 20-24.
  53. Wang, Y. and S. Kan (2014), "Corporate Culture and M&As Performance", Management World, (11), 146-163.
  54. Xia, Y. (2017), Study on the Relationship between Organizational Ambidexterity, M&A Strategy and Cross-Border M&A Performance: Taking the Chinese Technology Enterprises as Example (Doctoral Dissertation), Beijing: University of International Business and Economics, 81.
  55. Xie, E., K. S. Reddy and J. Liang (2017), "Country-Specific Determinants of Cross-Border Mergers and Acquisitions: A Comprehensive Review and Future Research Directions", Journal of World Business, 52(2), 127-183. https://doi.org/10.1016/j.jwb.2016.12.005
  56. Ye, K. T., F. Cao and H. C. Wang (2015), "Can Internal Control Information Disclosure Reduce Stock Price Crash Risk?", Journal of Financial Research, 416(2), 192-206.
  57. Zhang, D. Y., L. Lei, Q. Ji and A. M. Kutan, (2019), "Economic Policy Uncertainty in the US and China and Their Impact on the Global Markets", Economic Modelling, 79, 47-56. https://doi.org/10.1016/j.econmod.2018.09.028
  58. Zhou, M. H., B. Lin and D. J. Lin (2016), "Management Power, Internal Control and Corruption Governance", Accounting Research, 3, 56-63.