In terms of an empirical study based on Chinese listed companies

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AY 2021

C ROSS - BORDER M&A AND ITS R ELATIONSHIP WITH

C ORPORATE P ERFORMANCE

In terms of an empirical study based on Chinese listed companies

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S EMINAR H OT P APERS IN F INANCE

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Summary

This paper mainly discusses the effect of cross-border mergers and acquisitions on enterprises from all levels, and its relationship with various aspects of enterprises. Due to the impact of globalization, companies in many countries, especially developing countries, aim to build and expand their advantages through cross-border M&As. This paper evaluates in detail the potential advantages and relevance of cross-border M&As to enterprises. First, from a historical perspective, this paper examines the performance of cross-border M&As in various countries around the world and their local policies. At the same time, this paper analyzes the basic situation of Chinese cross- border M&As by analyzing the development of that in history, and discusses the particularity of Chinese companies to cross-border M&As, including the key role of the government in the process of M&As, and the influence of Chinese culture on the degree of acceptance during the period of post-M&A.

In terms of research, this paper selects 3,491 Chinese listed companies from 2011 to 2019

as a sample, and conducts an empirical test on companies that have undergone cross-border M&As.

As for model selection, this paper chooses a random effects model for testing. The research results show that in the past ten years, cross-border M&As by Chinese listed companies have indeed exerted a certain degree of positive impact on corporate performance. On this basis, this article points out that the Chinese government should increase policy and property support for Chinese companies’

cross-border M&As, and at the same time strengthen the integration effect afterwards, in order to cope with the strong globalization development and global resource sharing. This paper presents four different models, which take into account the influence of control variables and time effects on the overall model. Under the four models, the results are basically significant. At the same time, in order to prevent errors in the standards for evaluating corporate performance, the research adopted robustness test and further confirmed its significance.

Compared with past research, the possible innovations in this paper are: First, based on past research on cross-border M&As in developed countries, this paper fills the gaps in the research on Chinese cross-border M&A cases around the world. Second, the previous studies on cross-border M&As based on Chinese listed companies mainly focused on theoretical analysis or case analysis.

This article adds a large number of samples to perform regression model experiments on the basis of theory, and further explores the correlation between corporate performance and cross-border M&As. Third, this paper selects a sample of Chinese listed companies in the past nine years, of which, compared with past experiments, the time span is larger and the research sample is more comprehensive, making the results more convincing.

<Inside Cover>

C ROSS - BORDER M&A AND ITS R ELATIONSHIP WITH

C ORPORATE P ERFORMANCE

In terms of an empirical study based on Chinese listed companies

57191513-1 Z HANG Y IFAN

S EMINAR H OT P APERS IN F INANCE

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CHAPTER 1. INTRODUCTION ... 6

CHAPTER 2. LITERATURE REVIEW ... 8

CHAPTER 3. CROSS-BORDER M&AS AND THE PARTICULARITIES OF CHINESE CROSS-BORDER M&AS ... 16

Section 1. Cross-border M&As worldwide ... 16

Section 2. The overall performance of cross-border M&As in the world ... 18

Section 3. Special functions of the Chinese government ... 20

Section 4. The particularity of Chinese companies' knowledge transfer of cross-border. M&As ... 21

Section 5. The historical evolution and characteristics of Chinese companies' cross-border. M&As ... 23

CHAPTER 4. THE HISTORY OF CHINESE COMPANIES' CROSS-BORDER M&AS .... 25

Section 1. Basics ... 25

Section 2. Country and regional distribution of China's cross-border M&As ... 26

Section 3. Industry distribution of Chinese companies' cross-border M&As ... 27

Section 4. Summary of characteristics of Chinese OMAs ... 27

CHAPTER 5. EXPERIMENTAL HYPOTHESIS ... 29

CHAPTER 6. METHODOLOGY ... 31

Section 1. Sample selection and data sources ... 31

Section 2. Variable interpretation ... 31

Section 3. Research model and experimental results ... 32

3.1 Descriptive Statistics ... 32

3.2 Multicollinearity test ... 33

3.3 Hausmann test ... 34

3.4 Experimental results ... 35

3.5 Robustness test ... 37

CHAPTER 7. CONCLUSION ... 38

Section 1. Research Result ... 38

Section 2. Limitations ... 39

REFERENCES ... 41

CHAPTER 1. INTRODUCTION

In recent years, China’s rise in economy has made itself a leading position in the trend of

internationalization. Since the Reforming-and-Opening policy in the 1970s, the Chinese government has made progress in building globally leading companies in their size, technology,

manufacturing, etc. In 2001, China joined the World Trade Organization (WTO) and made a forward

step in the Global Economy. In the 2000s, the economic activities by multinational companies

(MNEs), primarily from the “BRICS” countries (Brazil, Russia, India, China and South Africa) have

embarked on the process of rapid globalization previously led by Europe and the United States.

Among these emerging countries, China is a significant case worth researching.

Recent studies have emphasized specific factors such as government, cross-culture, and

corporate management and their importance on the process of M&A (Merger and Acquisitions)

cases. However, there lacks a data comparison of the performance among these OMAs (Overseas

M&As), and hence this study provides a further comparison on OMA companies and their performance in post-M&A period. Overall, 3491 Chinese listed companies during Year 2011 to 2019

are put into the sample in the following chapters, which are quite informative. Each of the following

hypothesis will be discussed: First, what factors should be considered an impact on OMAs, and

among all the factors in OMAs, which is considered a greater impact that shows evidence on the

weaknesses in the whole internationalization process? Previous studies at the firm-level suggested that the firm size, firm type and its ownership, and international experience have positive

relationship with OMAs (Deng, 2012). Second, what is the purpose of going international? Previous

studies found a fact that most OMA companies in China hope to surmount weaknesses rather than

to leverage strengths. The role of central government in the OMAs is also in almost all aspects, in

that they have put forward catch-up strategies in “exploitation” and “exploration” during the

combination of overseas companies and an intuition in transferring technology or expertise to Chinese firms (Alon, 2008). Finally, the correlation between OMAs and the performance of the

company will be discussed.

CHAPTER 2. LITERATURE REVIEW

This paper will be reviewing the related literature in the two following aspects. First, it

discusses the influence of OMAs on the market value of the company. Second, it shows evidence of the influence of OMAs on the efficiency of the company.

For the impact on market value, Moeller and Schlingemann (2005) made a comparison

between the American domestic M&As and overseas M&As of the impact on earnings of the

company. However, what they have found tells that cross-border acquisitions cannot significantly

improve the American company’s efficiency on earnings. On the contrary, the increase of earnings by domestic M&As is comparatively more significant. Nevertheless, if the target company is either

a non-listed company or a company in the same industry, it shows a positive growth in the post-

M&A period. The research still cannot explain the positive correlation between OMAs and company

growth. Therefore, it is necessary to research on various types of companies (whether they are state-

owned, or private, etc.), with their M&A performance.

Hobday (1995) proposed the technology catch-up theory of “Latecomers”. He defines

Latecomer as a company that tries to seek breakthroughs in the market under the dual dilemma of

technical disadvantages and market disadvantages. In terms of technology, most of these companies

are located in developing countries. Due to their short period of getting access to new technologies,

their technological research, development capabilities and industrial technologies are underdeveloped. In terms of market disadvantages, due to their backwardness to the market and

advanced technologies, they lack competitiveness in the mainstream international market. Therefore,

the markets and users these companies are likely to be facing are in underdeveloped regions. The

purpose of these latecomers is to find some innovation and development methods to break through

barriers and establish connections with users. The difficulty of the catch-up theory is that the

development path of these latecomers cannot fully replicate the development path of those in developed countries because of national conditions and technological limitations. Mathews (2006)

put forward the theory of “Latecomer Internationalization” based on the catch-up theory. He

believes that latecomer companies can achieve technological and strategic overtaking by

accelerating the process of internationalization. Therefore, the motivations for achieving

technological breakthroughs through cross-border M&As are abundantly reflected in the past literature.

The market value of a post-M&A can well reflect the company’s acceptance of the target

company. On the other hand, there are some literatures that examine the impact of OMAs on

corporate efficiency. Bertrand and Zuniga (2006) researched the relationship between cross-border

M&A and corporate R&D investment, and drew conclusions that, first, OMAs cannot significantly promote company’s R&D, and second, there are differences in the impact of domestic M&A and

OMAs. However, other literatures such as Chari et al. (2009) and Stiebale (2013) find that after the

M&A, some of the company in America and German contribute to a positive investment in its R&D

and innovation. Some other companies show a decrease in employment after the merger, but a

significant increase in its profit. Therefore, through previous literature, no strong conclusion can be drawn on the relationship between OMAs and corporate R&D.

Guadalupe et al. (2012) analyzed the case of foreign acquisitions of Spanish companies.

According to the survey, they found that foreign-funded companies tend to acquire companies with

higher productivity, and after the acquisition, the target company will be technically rectified to

improve the parent company’s innovation capabilities and production efficiency. Stiebale & Reize

(2011) discussed the cross-border M&As of German SMEs (Small or Medium Enterprises), trying

to find out the relationship between foreign investment in the R&D input and output of their SMEs, but data before 2011 showed that foreign M&As had no effect on innovation. Stiebale (2016) used

European M&A data to further study the impact of technological exchanges between the two parties

on innovation. The results show that the number of patent applications of the acquirer has increased

significantly after the merger, while on the other hand, the R&D investment of its subsidiaries has

also decreased correspondingly. Empirical research shows that for developed countries, after successful M&As, the parent company usually further increases R&D investment in order to

maintain innovation advantages and transfer intangible assets such as technology and intellectual

property rights to subsidiaries. As for developing countries, because their ownership advantages in

the acquisition process are not prominent, they may not be able to transfer technology to their

subsidiaries like multinational companies in developed countries. Therefore, the analysis of cross- border M&As in developed and developing countries should be distinguished.

Due to China's international status, there have been many studies on Chinese companies'

cross-border M&As in the world in recent years. Deng (2009) studied the reasons for the surge in

the number of cross-border M&As in China in recent years through institutional theory. It explains

this economic effect through interviews and case analysis, that is, the Chinese government has produced some institutional incentives for transnational investment. At the same time, it pointed out

that the various irregularities in the market and intellectual property rights of Chinese companies

are one of the main reasons that cross-border M&As are affected by the system. Some other scholars

have expounded different theories. Rui (2008) proposed that the motivation of Chinese companies'

cross-border M&As is mainly the internal strategic goals of the company. On the one hand, in recent

years, Chinese companies have continued to expand in overseas markets. On the other hand, China

is limited by its lack of innovation capabilities. Therefore, Chinese companies could be eager to obtain strategic resources through cross-border M&As and enhance their comparative advantages.

Regarding the system, companies can circumvent domestic institutional restrictions through

corporate M&As, and at the same time make use of the institutional advantages of the target

company's region to make more optimal decisions. Li et al. (2012) analyzed the M&As of Chinese

and Indian companies from 2000 to 2008, and argued that the industrial advantage is another reason that drives M&As among multinational companies in addition to the advantages of national systems.

Because China and India are the two largest emerging markets in the world in recent years, it is

necessary to study them separately and compare their particularities.

At present, the Chinese government encourages domestic companies to implement

globalization strategies in a variety of ways. Therefore, many companies use cross-border M&As to enhance their position in the international market. Their purpose is to obtain advanced foreign

technology and resources through cross-border M&As, while avoiding trade barriers. Cross-border

M&A is an investment activity that involves both risks and opportunities. As a country with a

different political background and history from all other countries, has China perfectly used its

unique advantages in its system in cross-border M&As, and has it well accepted the differences between foreign environments and domestic companies in the process of internationalization? The

answer is what many scholars have been discussing in recent years.

Considering the rise of the Chinese economy in the world in recent years, many scholars

have shifted their research directions to the Chinese mainland market. From domestic research

perspective, Feng et al. (2011) compared the ownership of different M&As and concluded that

property rights have an impact on the efficiency of cross-border M&As. Fang (2013) believes that

due to different systems, system differences after cross-border M&As will affect the functioning of the corporate board of directors, thereby affecting corporate efficiency. Shao et al. (2012) compared

the performance of state-owned enterprises and private enterprises in cross-border M&As, and

argued that the special nature of state-owned enterprises has a positive impact on cross-border

M&As, because the management of state-owned enterprises can play a role in the process of M&As

and bring stronger synergy value. Gu and Reed (2011) researched on Chinese OMAs and the impact on corporate performance in Year 1994 to 2009. Shao et al. (2012) researched on the performance

of Chinese public company with their OMA events and proved that cross-border M&As can bring

positive influence to the market in the short period. Other researchers as Jiang Guanhong (2015)

and Jiang Dianchun (2014) made a comparison between the performance of Chinese OMAs and

greenfield investment, and specific attention is paid that with the “Go Global” policy presented by the Chinese government, Chinese company has a significant increase in its market value during

international investments. Based on the theory of "information asymmetry", Jia (2015) explored the

influence of geographic distance on cross-border M&As, and studied its influence mechanism. This

study suggests that cross-border M&As are a "regional" investment activity, and pointed out that

even in today's era of rapid technological development, "distance" is still a key factor affecting the process of corporate internationalization. On the other hand, the study verifies that state-owned

equity has an important impact on cross-border M&As. Because state-owned equity will bring more

international resources to enterprises, which offset the negative impact of state-owned enterprises'

lack of experience in cross-border M&As.

Other scholars focus on the impact of the system on China's cross-border M&As. Luo and

Tung (2007) analyzed China's cross-border M&A and its institutional factors and concluded that the

system and culture of the country where the target company is located has a significant impact on company performance in post-M&A period. Yan (2009) further studied the impact of corporate

performance caused by differences in the system and culture of the country where the acquired

company is located through the method of institutional factors. The results show that these two

factors have a significant impact on the company's performance after the merger. At the same time,

this research shows that, in terms of "cultural distance" and "economic regulation", if the two parties are far apart, the effect of M&As will not be significant. In other words, the performance of the

company after M&As will be poor. Zhu (2013) further verified this result based on the outsider

disadvantage theory. By the data of Chinese listed companies in recent years, it concludes that

"cultural distance" and "economic system" have a positive impact on cross-border M&As. Tian et

al. (2015) uses a sample of listed companies in 2012 to further examine the impact of various factors on cross-border M&As. The conclusion shows that most companies can obtain positive returns after

M&As and affirms the globalization policy advocated by the Chinese government. At the same time,

the research data indicated that although the "cultural distance" and the experience of M&As will

affect the results, the effect is not significant. In addition, it also found that the effect of M&As has

a certain relationship with the size of domestic companies: the smaller the size of the company, the greater the benefits of M&As.

In the second place, there are some studies on the risks of cross-border M&As. Borghese

(2001) believes that the reason for the financial risks is that the corporate organization of the M&A

parties are weak in coordination and adaptability, there is no corresponding integration measures for

the post-M&As, and shows a lack of planning for post-merger corporate governance. Xu (2000) and

Xian (2009) believe that because companies lack M&A experience, managers are unable to deal

with a series of emergencies brought about by M&A in a timely manner. Lin (2009)'s research shows that some companies that have established M&A risk management and control systems have

relatively low risks during M&A. Zhao (2006) put forward three major political risks brought by

cross-border M&As. The first is whether cross-border M&As will damage national sovereignty. The

second is whether the results of M&As will affect the stability of national policies. The third is

whether cross-border investment will conflict with people's livelihood interests. Therefore, the host country government will have certain doubts or resistance to M&As for the sake of national security

and interests.

Based on the above literature review on corporate cross-border M&As, this paper

summarizes as follows. First, from the perspective of foreign research, the current foreign research

on China's M&As is mainly based on the cross-border M&As of developed countries. On the contrary, there are fewer explanations for the phenomenon of cross-border M&As unique to

developing countries. There are particularities in developing countries, especially China, whose

internationalization process started late, and its national conditions are more complicated. Therefore,

the transnational influence of Chinese companies may be affected by many factors. At the same

time, the current literature lacks discussions on the political or geographic impact of M&As between countries.

This paper expands the previous research in the following three aspects: First, it draws on

the research model of Yu et al. (2014) and sets the corresponding variables and indicators based on

assumptions. The second is in the research sample which takes a sample of Chinese listed

companies' cross-border M&As from 2011 to 2019, and uses multiple linear regression methods to

test the actual impact of various variables on before and after mergers. At the same time, in order to

avoid possible limitations in the data, the samples have been selected and those with severe financial problems were to be moved to avoid different types of disturbance, and companies with incomplete

or abnormal financial report data were excluded to yield a homogenous data sample for quantitative

analysis.

CHAPTER 3. CROSS-BORDER M&AS AND THE

PARTICULARITIES OF CHINESE CROSS-BORDER M&AS

Section 1. C

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M&A

For cross-border M&As, different organizations in the world have many definitions. IMF

(International Monetary Fund) defines it as: acquiring the control of the enterprise by acquiring the

equity of a foreign enterprise or company, thereby obtaining the production and operating benefits

of the enterprise. The United Nations Conference on Trade Development defines cross-border

M&As as: (1) the merger of the two countries' enterprises, and (2) the acquisition of more than 10%

of the equity, which transfers the assets and control of domestic enterprises to foreign enterprises.

This paper believes that cross-border M&As should have the following characteristics: there

are two entities, the acquirer and the acquisition target, and the parent companies of the two entities

have different international boundaries; in addition, the acquisition of equity needs to reach a certain

proportion of 51%, so that after the acquisition, the parent company can control all the productions of the target company’s business activities, or at least 30%, so that the company can have a relatively

large power of control, having rights to participate in votes and decision-makings.

Cross-border M&As often bring potential benefits to companies. Therefore, developing

countries make foreign direct investment by using cross-border M&As to enhance their

competitiveness. Based on the past literature, the motivations for corporate cross-border M&As are as follows:

First of all, cross-border M&As can enable companies to obtain important strategic resources

and use them for their own development. Generally speaking, the acquirer often values important

resources of the target company when choosing an acquisition target. These resources have core

competitiveness and are difficult to imitate or copy. These resources include not only explicit assets

such as core technology and production capacity, but also intangible assets such as human resources and brand effects. It takes way more time to acquire these resources if one only relies on the

company's internal development instead of by M&As (Wernerfelt, 1984). Therefore, obtaining these

core resources through direct acquisition is one of the key means for the company to enhance its

competitiveness in a short period of time. Furthermore, the parent company should have a certain

level of “absorptive capacity”, so that they can efficiently learn from the experience from the target company.

Secondly, cross-border M&As are an important way of learning within enterprises (Deng,

2009). However, it should be clarified that different companies may bring with different capacity of

learning experience in that, for example, if an M&A happened through two different industries, the

parent company may be facing problems on how to sufficiently benefit from the experience. Thus, at the national level, the national culture and political systems of the parties to the merger may be

different. At the same time, the corporate culture of the two parties and their understanding of the

local market are also different. Therefore, cross-border M&As are an integration of culture and

knowledge. Take some famous cross-border M&As in the past as examples. Lenovo (acquiring

IBM’s computer business) and Geely (acquiring Volvo), etc., made organizational changes to the internal personnel of the company during the acquisition, avoiding the company’s lack of innovation

or "organizational inertia," as well as addressing other issues. At the same time, because Chinese

companies tend to have relatively short development history with foreign countries, in terms of

corporate governance and other issues, cross-border M&As can allow Chinese companies to learn

advanced foreign management knowledge in order to enhance the company's comprehensive

strength.

Third, cross-border M&As are one of the means to open up new markets. Chinese companies have entered the international market for a relatively short time, and the market has been divided by

many international companies. Therefore, through cross-border M&As, Chinese companies can

open up new sales scales, and at the same time establish brand advantages in the target market and

close relationships with customers.

In summary, cross-border M&A, as a flexible and direct means of foreign investment, is an important means to rapidly enhance the competitiveness of enterprises. Therefore, for Chinese

companies eager to acquire core technologies or occupy the international market, cross-border

M&As are of great strategic significance.

Section 2. T

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M&A

The performance of cross-border M&As as a form of direct foreign investment in countries

around the world is not consistent, because it is affected by the historical development and

background of different countries. Furthermore, the different techonolgical development of different

countries also plays a key role in that, for two countries that are close, they can easily understand

detailed technology on production and operations of each other. When it comes to high tech sectors such as electronics or software, the distance in technological development of the two company in a

M&A is of vital importance. Therefore, although China has taken a positive attitude towards cross-

border M&As in recent years, its performance should be compared with that of other countries.

Globerman et al. (2009) believe that compared with developing countries, developed countries have

a relatively conservative attitude towards foreign investment, especially when the target is a

developing country like China whose economy is still in its infancy.

Taking the United States as an example, since the 1980s, it has carried out a series of controls on cross-border M&A, and issued special laws and restrictions. As one of the most active countries

participating in international investment in the West and even in the world, the US has a relatively

rigorous legal system for M&A. The United States is also the first country to introduce laws

restricting corporate M&As, such as the Clayton Act of 1914, which aims to create a level playing

field for many companies, oppose monopoly, or a series of state M&A laws, which are manifested in foreign countries. Prevention and sanctions against malicious M&As. It is particularly important

that the United States has extremely strict restrictions on cross-border M&As in certain areas. For

some special industries, such as national security, aviation, shipping, tele-communications, or

finance, the US Congress will restrict the shares of multinational investors, preventing them from

threatening their own economic and political security.

In contrast, the United Kingdom, as a free-trade island country, does not have the same

stringent policies as the US on foreign-invested companies' investment in the UK. Except for some

of the special industries mentioned above, such as transportation or tele-communications, foreign

investors are free to invest in the UK. The UK’s legal constraints on international investment are

mainly reflected in fairness, that is, whether foreign investment will have an impact on British local companies, whether it is in line with fair competition, or whether it will affect the employment rate

in the UK.

In some developing countries and regions, such as Latin America and Southeast Asia, some

countries have generally strengthened the encouragement and protection of transnational investment

in recent years. Like China, these developing countries hope to stimulate their own economic

development by introducing foreign investment. The specific manifestation is that these countries

have reduced the restrictions on cross-border M&As in recent years and have increased the treatment of foreign investment in order to attract more foreign investors. For example, in 1998,

Chile and Mexico signed a free trade agreement to reduce restrictions on cross-border investment

and encourage mutual investment. The ten ASEAN countries in Southeast Asia have also formed

various trade agreements with developed countries in recent years, lowering the threshold for cross-

border M&As and making cross-border investment easier.

Section 3. S

C

Buckley et al. (2007) believe that for Chinese enterprises, the government plays a

particularly important role, and at the same time has many influences on the internationalization of

enterprises.

First of all, China's institutional requirements for enterprises play a supporting role in

international investment such as cross-border M&As. China joined the World Trade Organization in 2001, and implemented the "going out" strategy at the same time, using this as an opportunity to

introduce a series of policies to encourage Chinese companies to invest abroad. For example, the

Chinese government has reduced taxes on foreign investment and increased credit at the same time,

so as to provide enterprises with financial support for internationalization. On the other hand, the

Chinese government has formulated many bilateral agreements with other countries in order to create a favorable environment for foreign investment. In addition, the Chinese government has also

investment.

Second, the nature of Chinese companies has a great impact on the income of cross-border

M&As. The aforementioned government encouragement policies are often aimed at some special industries. For example, in order to enhance their innovation capabilities, some innovative

companies will expand overseas with the support of the Chinese government and obtain technical

support from abroad. At the same time, state-owned property rights are an important resource for

the long-term development of Chinese enterprises, which is also an important reason for the

different nature of Chinese enterprises. Buckley et al. (2007) show that the government can effectively participate in the decision-making of enterprises' international investment by holding

shares in state-owned enterprises, and at the same time provide the resources needed for the

internationalization of enterprises. Another particularity of state-owned equity is that state-owned

enterprises will face stricter supervision when using important state-owned resources such as land,

which will restrict foreign investment.

In summary, the particularity of Chinese companies' cross-border M&As lies mainly in the

role of the government. While the government provides important resources for enterprises, it also

imposes certain institutional constraints on the internationalization of enterprises.

Section 4. T

C

'

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M&A

Due to the continuous improvement of professional development in the past decades, there

is no guarantee that everyone from enterprises to individuals can master all knowledge in their own

fields. In contrast, people can only be as efficient as possible to familiarize themselves with a small

part of their work-related or experience. The literature shows that, for other countries, Chinese

companies have certain particularities in the knowledge transfer after cross-border M&As. Due to

various policy or cultural reasons, this includes some advantages that enable Chinese companies to

quickly accept external knowledge, as well as some policy disadvantages that lead to imperfect knowledge absorption.

From a cultural perspective, as a country with a long history, China has embodied the

character and consciousness of tolerance in the long historical process. In philosophy, the "Ren"

(benevolence) advocated by ancient Chinese philosophers such as Confucius and Laozi advocated

equal and harmonious coexistence among people. For thousands of years, this concept has penetrated into Chinese people in their culture and the way of thinking. In contemporary times, this

also has a positive effect on interpersonal relationships in enterprises. Bjorkman et al. (2007)

mentioned that a strong sense of belief in a team helps the transfer of knowledge between people.

Therefore, Chinese culture plays a positive role in knowledge transfer in cross-border M&As.

Voss et al. (2010) believe that China has the world's leading network construction capabilities in recent years. Zhou et al. (2007) show that the network plays a vital role and influence

in the internationalization process of enterprises in developing countries. As the most direct source

and means of investment information, the network helps Chinese companies find and participate in

potential investment opportunities. For Chinese companies, China can coordinate and communicate

through a network of relationships in a complex system, which plays a positive role in the absorption of knowledge. On the relationship network, overseas Chinese from all over the world have also

contributed a lot to the relationship network of Chinese enterprises. In the past few decades, overseas

Chinese have played a good role in information transmission and connection to the investment

activities in mainland China. From this perspective, China's relationship network is another major

advantage of knowledge transfer after cross-border M&As.

From the perspective of the enterprise, the classification of knowledge can be roughly

divided into two categories: technical ability and coordination ability. Technical capabilities include advanced innovation capabilities, that is, professional related knowledge, such as research and

development of new products or new markets. Coordination ability refers to the knowledge of

coordination and management in corporate M&As, company operations and governance. The ease

of acceptance of these aspects of knowledge is definitely not an equal relationship, so in the

following empirical analysis, this paper will analyze the relevance of knowledge transfer and Chinese companies' cross-border M&As.

Section 5. T

C

'

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M&A

This chapter mainly introduces the historical development of Chinese companies' cross-

border M&As, and analyzes the industry distribution of companies' cross-border M&As to determine its characteristics. Through a large amount of literature in the past, research has

consistently shown that companies, especially those in developing countries, will enhance their

competitiveness through cross-border M&As. Taking the example of Lenovo acquiring IBM’s PC

service, the business performance of Lenovo right after the merger was not perfect. However, after

the integration in different groups within the two companies, the PC services of Lenovo shows a significant increase. It shows same results to other industries, such as the Geely case in the

automobile industry. It is clear that the main motivation for enterprises in developing countries to

conduct cross-border M&As is to acquire strategic assets and markets (Deng, 2009). But at the same

time, there are companies with different motives for cross-border M&As in the market, which also

leads to the distribution of these companies in different industries.

The main object of this paper is the cross-border M&A cases of Chinese companies.

According to a report in 2020 released by the Ministry of Commerce in China, as the world's largest developing country, China's total OFDI (Outward Foreign Direct Investment) has reached 149

billion U.S. dollars in 2020, making it one of the largest contributions in the international trade

market. These OFDI is put forward in many forms, such as equity participation, or establishment of

joint ventures. Cross-border M&As are also one of the most important ways for Chinese companies

to invest abroad. Therefore, the sample of China's cross-border M&As in this paper is representative of China's OFDI. All the data in this paper comes from the Chinese financial data website WIND,

which contains more than 95% of publicly announced cross-border M&A cases in China. At the

same time, the database is also known as China's Bloomberg, and it is one of the databases

commonly used by many Chinese scholars and institutions.

CHAPTER 4. THE HISTORY OF CHINESE COMPANIES' CROSS-BORDER M&AS

Section 1. B

Since the Reforming-and-Opening policy in 1978, China has ushered in a new wave of

foreign investment. In the ten years since 1982, Chinese companies have completed 21 cross-border

M&A cases. There were not many successful cases during this period, in that the Chinese economy

was still in its infancy and both the government and the companies found that it was a promising

approach to go global through cross-border M&A.

In the following 10 years, between 1992 and 2002, the number of Chinese cross-border

M&A cases has risen to 325, of which 242 were completed. Although its trading volume was still

small worldwide, it has grown rapidly compared to the previous decade. During this period of time,

China's economy has experienced several critical moments, during which the Asian financial crisis

has had a considerable impact on the internationalization of Chinese companies. On the other hand, China's successful accession to the WTO in 2001 once again promoted the process of Chinese

enterprises going global.

After 2002, China's cross-border M&As ushered in a stage of rapid development. After

China joined the WTO, it has implemented “Go Global” policy. As of the time of this paper, Chinese

companies have completed more than 3,000 cross-border M&As in the past 20 years, ten times that of the past 20 years. But on the other hand, the number of successful M&As accounted for only

about 1,500, and the success rate was only 50%. During this period, the 2007 world financial crisis

affected many companies in developed countries, which, on the other hand, provided opportunities

for Chinese companies to make cross-border M&As. After 2007, many companies with financial

strength in China completed acquisitions of companies in developed countries, while a large number

of Chinese companies went abroad and quickly occupied the once depressed international market through M&As.

Section 2. C

C

'

-

M&A

According to the statistics of Jia (2015), in more than 3,000 cross-border M&A cases by

Chinese companies in the past four decades, the host country of more than 30% of the cases came from Hong Kong, followed by the United States and Australia. At the same time, developed

countries accounted for more than 80% of companies' cross-border M&As. Therefore, it can be seen

that the preferred countries and regions for Chinese companies' cross-border M&As are developed

countries. At the same time, due to geographical and historical reasons, Hong Kong, which borders

mainland China, has become the first choice for Chinese companies' cross-border M&As. However, the data also shows that Japan and South Korea, both of which are in Asia and are developed

countries, do not account for much of the case. It is speculated that the reason could be that the

strategic development direction of Chinese companies is inconsistent with these target countries.

This also provides a research direction for the future.

At the same time, although China's past cross-border M&As target countries are extensive, they are mainly concentrated in developed countries such as Hong Kong, the United States and

Australia. This is consistent with what is mentioned earlier in this paper, that is, Chinese companies

expect to absorb advanced technology and management capabilities from companies in developed

countries, and at the same time chase the economic gap between themselves and developed countries.

Therefore, this data verifies the motivation of Chinese companies to conduct cross-border M&As

in pursuit of knowledge advancement previously proposed in this paper.

On the other hand, a small number of Chinese companies also invest in underdeveloped regions and countries, but these M&As have mainly occurred in recent years. It can be seen that

under the strong economic strength of China, Chinese enterprises are transforming into a “resource-

seeking” direction. In other words, Chinese companies have set their future development goals on

the world's natural resources. This is another motivation for Chinese companies' cross-border

M&As.

Section 3. I

C

'

-

M&A

From the perspective of the industry distribution of M&As, the main target industries for

M&As of Chinese companies in the past 40 years have been construction and mining industry, and

the sum of the two has exceeded one-half of the total number of OMAs. On the other hand, the financial industry and the service industry are also the main target industries for major M&As. But

the data also shows that in the past 40 years, China's cross-border M&As in various industries have

shown different growth rates. Among them, the financial industry and the manufacturing and mining

industries have grown rapidly, which is consistent with China's main economic goals in the past few

decades.

Section 4. S

C

OMA

In summary, based on the WIND database, this chapter analyzes the 40-year history of Chinese companies' cross-border M&As in many aspects. In terms of the period of time of its

characteristics of Chinese enterprise M&As. These analyses give the paper a further understanding

of Chinese companies' cross-border M&As, and at the same time provide a theoretical basis for the

following empirical research.

CHAPTER 5. EXPERIMENTAL HYPOTHESIS

It should be noted that corporate M&A should be a long-term activity, including all aspects

of investigations required in the early stage, as well as various property transfers after the mergers.

In the previous chapters of this paper, we discussed the motivations of companies' cross-border

M&As, which can be regarded as a part of pre-M&A that should be considered. In order to have a

more comprehensive understanding and analysis of various factors affecting cross-border M&As, it

is also necessary to examine the performance of companies after they complete cross-border M&As.

As mentioned in the previous chapters of this paper, there are many factors that affect the success or failure of cross-border M&As, including cultural, political, and industry factors.

Therefore, this chapter starts from these perspectives and proposes hypotheses based on the factors

derived from the above analysis, and then conducts data analysis in the following empirical part.

Xue (2017) put forward the view that the financial characteristics of the company in its

merging year can be well reflected in the performance during the post-M&A. For example, the company’s growth rate, its financial performance in the previous year, and other characteristics of

different industries may bring different results to the merger. Based on the above point of view, this

paper studies the issue of whether Chinese companies' cross-border M&As have a positive impact

from all aspects of corporate financial information. Shao (2012) proposed that the "wealth creation"

effect of a company is most intuitively reflected in its stock return, because the stock return reflects the degree of recognition of cross-border M&As by market participants worldwide. Therefore, he

believes that it is reasonable to discuss cross-border M&As from the perspective of the degree of

participation in the capital market. On the other hand, this can only reflect the influencing factors

of the external market. In other words, the performance of a company in the stock market cannot

fully represent the actual competitiveness or production efficiency of the company, let alone that its

strength improvement is affected by cross-border M&As.

This paper believes that another aspect that reflects whether cross-border M&As have an impact on a company should be determined by the company’s actual production efficiency if they

have been improved. In other words, this paper explores whether the actual product or market

advantage of the company has become more efficient. As mentioned above, the current research on

cross-border M&As in the world is mainly concentrated in developed countries, and broadly based on the level of "market value" after M&As. Since China is in the growing period of large-scale

cross-border M&A events, this paper attempts to find a series of relationships between corporate

cross-border M&As and their own characteristics. Finally, this paper put forward the hypothesis:

H1: Cross-border M&As have a positive relationship with the nature of the company, the

age of the company, and the size of the company.

CHAPTER 6. METHODOLOGY

Section 1. S

In this paper, a sample of cross-border M&As of Chinese listed companies from 2011 to 2019 is taken to analyze the influence factors of cross-border M&As on performance. At the same

time, in order to prevent data results from being affected, companies with abnormal financial data

and incomplete disclosure were excluded from the sample. The sample data comes from the Chinese

financial database WIND. Finally, 1296 OMA cases out of 3491 listed companies were selected for

empirical research, including 2195 companies that did not participate in cross-border M&As as a comparison.

Section 2. V

This paper takes the comprehensive performance of the enterprise as the explanatory

variable, the evaluation index is the company's EPS, and ROE is used as a substitute index in the

robustness test.

In this empirical study, the nature of enterprise (SOE) is set as a moderating variable. The

specific method is to set state-owned enterprises to 1, and non-state-owned enterprises to 0. In addition, OMA is set to be the variable to define if the sample happened to have an M&A case. It

also selects other matching variables, including the age of enterprise (Age), corporate assets (Asset),

debt to asset ratio (Lev), corporate growth (growth). The regression equation is shown as:

𝑌_!"= 𝛽_#+ 𝛼_$𝑇_"𝑑𝐵_!+ 𝛼_%𝑎𝑠𝑠𝑒𝑡 + 𝛼_&𝑎𝑔𝑒 + 𝛼_&𝑙𝑒𝑣 + 𝛼_&𝑔𝑟𝑜𝑤𝑡ℎ + 𝜀_!",

where 𝑇"𝑑𝐵! = 𝑂𝑀𝐴(𝑑𝑖𝑑 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒), i stands for each company, t stands for the time.

Therefore, 𝑌_!" is the EPS/ROA of company i during year t. 𝑇_"𝑑𝐵_! is the dummy variable which it

determines whether the company has an OMA case at the period and was influenced. If there is at

least one case, then T=1, or T=0.

The specific explanation for the equation is shown in Table 1:

Table 1

Section 3. R

In order to study the specific performance of multiple variables after cross-border M&As, and eliminate the possibility of multicollinearity among the variables, this paper adopts the

multicollinearity test, and uses the correlation coefficient matrix and the variance expansion factor

method to test each variable. At the same time, H0 is verified through Hausmann's test to determine

whether random effect model (REM) or fixed effects model (FEM) should be adopted. Finally, four

models were established respectively to compare the whole using the random effects model to determine whether each indicator was significant.

3.1 Descriptive Statistics

This paper uses the data from 2011-2019 recorded in the WIND database to make descriptive

statistics on the main indicators, as shown in the following table:

Type Name Code Explanation

Dependent Variable Earnings Per Share EPS Company's Earnings per share Moderating Variable Overseas M&A cases OMA OMA cases=1

Nature of the Enterprise SOE State-owned company=1, private company=0

Explanatory Variable

Age of the Enterprise AGE Company's age

Corporate Asset asset Company's total asset in target year Debt to asset ratio Lev Lev=Total Debts/Total Assets

Growth Perspects Growth Growth=(ΔBusiness Income/Last Year's Income)

(1) (2) (3) (4) (5)

VARIABLES N mean sd min max

id 21,210 2 900956

year 21,210 2011 2019

EPS 20,013 0.362 0.850 -16.75 35.00

ROE 21,210 -0.891 263.0 -23,510 5,158

OMA 21,210 0.165 0.371 0 1

industry 13,910 34.88 17.63 0 90

AGE 21,136 17.84 24.31 0 780.7

asset 21,210 22.05 1.315 17.28 29.63

lev 21,210 41.43 54.39 0.752 6,397

SOE 21,186 0.327 0.469 0 1

Growth 20,013 111.9 4,218 -2,859 450,002

Number of id 3,491 3,491 3,491 3,491 3,491

Table 2

From these statistics, the sample size is shown to be 3,491, which means that 3,491 listed

companies are analyzed by the test. From the mean of OMA, which is 0.165, we can find that most

of the sample companies are non-state-owned. In other words, there are few state-owned companies

that had completed at least one OMA case during this period of time. From AGE, where its mean is

17.84, it shows that most companies in the sample have a relatively long history of development, and provides robustness to our statistics, since compared with new companies, companies that have

developed for a long time have a more stable level of development and will not produce large

fluctuations.

3.2 Multicollinearity test

In order to prevent the existence of multicollinearity among various explanatory variables,

this experiment first tested the multicollinearity among various variables. See the result below in

Table 3:

Pairwise correlations

Variables (1) (2) (3) (4) (5) (6) (7)

(1) ROE 1.000

(2) EPS 0.129* 1.000

(3) OMA -0.011 -0.012 1.000

(5) asset 0.012 0.152* 0.161* 0.267* 1.000

(6) lev -0.030* -0.135* 0.031* 0.082* 0.163* 1.000

(7) Growth 0.001 0.016* -0.003 0.002 0.008 0.005 1.000

* shows significance at the .05 level

Table 3

It can be seen from the above table that the correlation coefficients between the various

variables are low, and there is no case where the correlation coefficient is greater than 0.7 at the 5%

significance level. Therefore, this test preliminarily informs that there is no serious multicollinearity

problem.

In addition, in order to ensure the robustness of the multicollinearity problem test, this paper

uses the VIF method to test, and the results are as follows on Table 4:

Variable VIF 1/VIF

asset 1.13 0.888591

AGE 1.08 0.925113

OMA 1.03 0.973895

lev 1.02 0.97571

Growth 1 0.999902

Mean

VIF 1.05

Table 4

It can be seen from the above table that the VIF values are all less than 2, it can therefore be determined that the model does not have serious multicollinearity problems and next step could be

continued.

3.3 Hausmann test

In the processing panel regression analysis, whether to use a fixed effect or a random effect

model, this paper uses Hausmann's test, and the results are as follows. According to the table, the P

value is 0.173, and because P>0.1, this experiment adopts the random effects model (REM) for

regression test. See the results in Table 5:

(b) (B) (b-B) sqrt(diag(V_b

FE RE Difference S.E.

OMA -12.6936 -11.59761 -1.095982 4.916493

AGE 0.184858 0.116679 0.0681784 0.115961

asset 0.813036 3.823935 -3.010899 3.358933 lev -0.045065 -0.082386 0.0373209 0.015388 Growth 0.000051 0.000058 -7.04E-06 0.000079 _cons -18.78012 -83.10886 64.32873 73.50171

Hausman (1978) specification test result Coef.

Chi-square test value 7.707

P-value 0.173

Table 5 3.4 Experimental results

The regression results are shown in Table 6:

(1) (2) (3) (4)

VARIABLES EPS EPS EPS EPS

OMA -0.067*** -0.026 -0.118*** -0.058***

(-3.49) (-1.24) (-5.45) (-2.58)

AGE 0.004*** 0.004***

(5.42) (5.63)

asset 0.080*** 0.109***

(5.00) (6.71)

lev -0.002** -0.002**

(-2.06) (-2.05)

Growth 0.000 0.000

(1.40) (1.32)

Constant 0.423*** 0.498*** -1.317*** -1.831***

(35.65) (38.88) (-4.01) (-5.54)

Observations 20,013 20,013 19,939 19,939

Number of id 3,508 3,508 3,484 3,484

Year FE NO YES NO YES

Robust z-statistics in parentheses

*** p<0.01, ** p<0.05, * p<0.1

For model (1), we can see that after using the random effects model, the overall model is

significant at the 1% significance level without adding control variables, or the time effect, where

the OMA coefficient is -0.067. Since the significance level is significant, we can conclude that cross- border M&As have an inhibitory effect on corporate performance.

For model (2), we can see that after using the random effects model, without adding control

variables, and controlling the time effect, the overall model is not significant at the 1% significance

level, which may be due to the time effect on the model.

For model (3), we can see that after using the random effects model, adding control variables, and not controlling the time effect, the overall model is significant at the 1% significance level,

where the OMA coefficient is -0.118. The result show that after the OMA, the performance of the

companies has significantly decreased by 0.118%. In addition, the size of the company (asset) and

debt to asset ratio (Lev) both have a significant impact on the performance of the company. For the

asset, we can see that its coefficient is 0.080, and it is significant at the 1% significance level. We can get the result that enterprise size effect has a significant positive impact on the company’s

earnings per share. For every 1% increase in company size, the company’s EPS will increase by

0.08%; for debt to asset ratio, the coefficient is -0.002, and it is significant at the 5% significance

level, which can be seen that debt to asset ratio has a significant negative impact on corporate

earnings per share. For every 5% increase in debt to asset ratio, corporate EPS will decrease by 0.002%.

For model (4), we can see that after using the random effects model, with control variables,

and time effect taking into consideration, the overall model is significant at the 1% level, where the

OMA coefficient is -0.058. For conventional variables, the regression results are basically consistent

with the results presented by the model (3).

3.5 Robustness test

In order to eliminate the error caused by the selection of EPS to evaluate corporate

performance, this paper further replaces the EPS index with ROE, and conducts a robustness test

again. The test results are shown in the following table:

(1) (2) (3) (4)

VARIABLES ROE ROE ROE ROE

OMA -11.271* -2.132 -11.598* -3.836

(-1.71) (-0.37) (-1.77) (-0.70)

AGE 0.117** 0.203***

(2.32) (3.23)

asset 3.824 6.822*

(1.29) (1.85)

lev -0.082 -0.078

(-1.07) (-1.04)

Growth 0.000 0.000

(2.28) (0.99)

Constant 0.305 14.408*** -83.109 -136.447*

(0.12) (2.78) (-1.27) (-1.74)

Observations 21,210 21,210 19,939 19,939

Number of id 3,515 3,515 3,484 3,484

Year FE NO YES NO YES

Robust z-statistics in parentheses

*** p<0.01, ** p<0.05, * p<0.1

It can be seen that for models (1) and (3), under the premise that the random effects model

is adopted and the time effect is not controlled, the overall model is still significant. Therefore, it

can be concluded that the results of this paper have good robustness.

CHAPTER 7. CONCLUSION

Section 1. R

R

From the perspective of historical development, this paper studies the cross-border M&As of Chinese companies as a developing country and their impact on the internal performance of

companies. With the continuous advancement of the internationalization process, China and other

developing countries have begun to make up for their own shortcomings through international

investment and quickly establish competitive advantages. In recent years, many failed cross-border

M&As have shown that it is not easy to obtain corporate income through a cross-border M&A.

Therefore, it is particularly important to explore the correlation between cross-border M&As and

corporate performance gains.

First, this paper analyzes the history and performance of cross-border mergers and

acquisitions in various countries in the world, and cites cross-border M&As cases and related laws

and regulations in many countries. At the same time, this article enumerates and analyzes the various problems that developing countries face in cross-border M&As. Secondly, this paper draws on the

literature of various countries, and counts the specific performance of China's cross-border M&As

in various historical stages, and discusses its influencing factors. From the perspective of the

characteristics of China's cross-border M&As, China's cross-border M&As are mainly concentrated

in developed countries such as Hong Kong, the United States and Australia, and have little relevance to factors such as cultural distance and geographic distance. At the same time, Chinese cross-border

M&As are mainly concentrated in industries such as manufacturing, finance or real estate. At the

same time, the company's own experience also has a positive impact on Chinese cross-border M&As.

This paper uses a random effects model to analyze China's cross-border M&A cases from

year 2011 to 2019, and uses a regression model to illustrate the correlation between cross-border

M&A and corporate performance, from which the result shows a negative correlation. Therefore, it can be further determined that, to a certain extent, Chinese companies' cross-border mergers and

acquisitions cases can impact on Chinese companies of their performance. For the reason of the

negative correlation, the paper suggests that, first, the financial statistics of the companies that have

just completed the merger are not yet stable and may fluctuate in the first or two years, and second,

same as the result of previous literature, Chinese companies should strengthen the management after cross-border M&A to better absorb the strategic resources acquired from M&A.

The research samples selected in this article are from 2011 to 2019. Due to the impact of the

epidemic, the global economy was expected to show a contraction trend in 2020. In order to prevent

data from causing errors, this paper removes the samples after 2020. Therefore, this article has its

reference value to a certain extent, avoiding the short-term global special circumstances to interfere with the research purpose. At the same time, this paper selects more than 3000 listed companies as

sample analysis. In the case of a large amount of data, the regression model is significant. Therefore,

this research can explain to a certain extent that in the past ten years, cross-border mergers have a

positive impact to Chinese companies.

Section 2. L

The research in this paper still has the following shortcomings, which can be further

improved in future research:

First of all, although this article has put the industry differences of listed companies in counts,

and only conducts a descriptive analysis.

In addition, for the cultural difference, this paper believes that the settled conditions are quite

vague, and thus some specific conditions can be used to limit the experiment to improve the accuracy.

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