Financial Market Integration and the Value of Global Diversification : Evidence from US Acquirers in Cross-Border Mergers and Acquisitions

In contrast to the previously documented cross-border discount, we find that there is positive cross-border effect for U.S. acquirers during late 1990's and early 2000's. Especially those that acquire/merge with targets from segmented financial markets experience significantly higher positive abnormal returns than those with targets from integrated financial markets. Furthermore, firms acquiring segmented market targets are also characterized by significantly higher post-merger operating performance improvement. The results indicate that the observed positive cross-border effect is mainly due to the increase of the transactions involving targets from segmented markets, in which average firms experience financial constraints. We suggest that value is created by a combination of firms with different financial market integration status, in which funds are provided to high cost firms. Furthermore, the fact that the value creation is even higher within the group of firms with lower costs of capital supports our conjecture