The Role of Acquisitions in Foreign Direct Investment: Evidence from the U.S. Stock Market




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    • Darden School of Business, University of Virginia, Charlottesville, and School of Business, University of North Carolina at Chapel Hill. We thank Rick Boebel, Shawn Phelps, and Stephen Kangas for excellent research assistance and Julian Franks for his collaboration on related research. Earlier versions of this paper were presented at seminars at the University of North Carolina, Virginia Tech, Old Dominion University, the University of Virginia, and at the 1990 Western Finance Association Meetings, and we appreciate the comments of numerous colleagues including Tony Baglioni, Jennifer Conrad, Mark Eaker, Ken Eades, Ken Froot, Bill Sihler, and Sherry Jarrell. Harris and Ravenscroft thank Darden Sponsors and UNC for research support.


This paper examines foreign direct investment by studying shareholder wealth gains for 1273 U.S. firms acquired during the period 1970-1987. Three findings stand out. First, cross-border takeovers are more frequent in research and development intensive industries than are domestic acquisitions; furthermore, in three-fourths of cross-border transactions the buyer and seller are in related industries. These industry patterns suggest that costs and imperfections in product markets play an important role in foreign direct investment. Second, targets of foreign buyers have significantly higher wealth gains than do targets of U.S. firms. This cross-border effect is comparable in size to the wealth effects of all-cash and multiple bids, two effects receiving substantial attention in the finance literature, and is robust to inclusion of these two variables. Third, while the cross-border effect on wealth gains is not well explained by industry and tax variables, it is positively related to the weakness of the U.S. dollar, indicating a significant role for exchange rate movements in foreign direct investment.