WEALTH EFFECT FOR U.S. ACQUIRERS FROM
FOREIGN DIRECT INVESTMENTS

Halil Kiymaz
University of Houston-Clear Lake

Houston, TX

Abstract

This study investif?ates the wealth effects offoreign direct investments on US.
firms during the period of 1989-2000. Overall findings indicate that US.
acquirers experience statistically significant wealth gains of0.57 percent around
the announcement of acquisitions. The wealth effects do vary with location (~f
target firms and acquirers' industry affiliation. Acquisitions in Europe yield
significant positive wealth gains while acquisitions in AsiaIPac(f'ic, North
America, and Latin/Central America regions yield negative wealth gains. The
highest wealth gains to US. acquirers occur when they acquire targets in
France followed by acquisitions in the UK. Canadian acquisitions, on the other
hand, yield negative sign~ficant wealth gains. The highest wealth gains are also
observed in the services industry followed by acquisitions in the manufacturing
and food industries. Acquisitions in mining/extraction, paper products, and
communications sectors, on the other hand, yield statistically significant nega-
tive wealth gains to acquirers.

Introduction

The U.S. foreign direct investment (FDr) has increased to $66 billion in
2000 from $33 billion in 1994. Europe and Latin America are the largest
recipients of the U.S. foreign investments. There are studies (i.e. Zhang,
2001; and Ramirez, 2002) investigating the determinants of foreign direct
investment at the macro level by using real GDP, the real exchange rate, and
political factors. Foreign direct investment in the form of mergers and acqui-
sitions (M&As) constitutes an important part of foreign direct investment.
Given the growth in FDr flows to foreign countries over the years, one would
expect to observe certain benefits accruing to firms involved in acquisition
activities. Various studies have investigated the wealth effects to both the
target and bidding firms involved in domestic acquisitions. The general
conclusion for domestic acquisitions is that shareholders of target firms
receive the largest gains from corporate takeovers while the evidence re-
garding the premium received by acquiring firms' shareholders is inconclu-
sive (i.e. Malatesta, 1983; Dennis and McConnell, 1986; Dodd, 1980; and
Asquith and Kim, 1982).



8 Journal of Business Strategies Vol. 20, No.1

Cross-border acquisitions can provide benefits to acquiring firms that might
not be fully realized by their shareholders through cross-country portfolio diver-
sification. Therefore, cross-border acquisitions may increase the value of a firm.
These benefits arise from firms' greater ability to use their strategic advantages
in international financial and product markets, which result from differences in
such items as tax structures, markets for corporate control, government regula-
tions, and technology. For example, Manzon, Sharp, and Travlos (1994) show
that U.S. multinationals derive incremental benefits through foreign acquisi-
tions by using their international financial networks to selectively repatriate
dividends in a tax-beneficial manner. Heston and Rouwenhorst (1994) find that
diversification across countries within an industry is a much more effective tool
for risk reduction than industry di versification within a country.

Several studies have investigated the wealth gains in international acqui-
sitions. Among them, Vasconcellos, Madura, and Kish (1990) and Connell
and Conn (1993) examine the mergers between U.S. and the U.K. firms;
Kang (1993) and Pettway, Sicherman, and Spiess (1993) focus on mergers
between U.S. and Japanese firms. Fatemi (1984) and Doukas and Travlos
(1988) probe U.S. firms engaged in foreign acquisitions. Harris and
Ravenscraft (1991) and Cebenoyan, Papaioannou, and Travlos (1992) inves-
tigate U.S. targets of foreign firms. Dewenter (1995) compares the wealth
effects of U.S. targets (chemical and retail industries) of domestic acquirers
versus those of foreign acquirers. Cakici, Hessel, and Tandon (1996) and
Kiymaz and Mukherjee (2000) show that country diversification plays an
important role in determining wealth gains to merger participants. An over-
whelming majority of studies either focus on only two countries, or else they
lump all foreign countries together and thus do not examine country and
industry specific differences in wealth effects.

This study examines the wealth effects that result from acquisitions an-
nouncements for U.S. firms involved in cross-border acquisitions in four differ-
ent regions and 24 countries during the period of 1989-2000. Specifically this
study investigates the following questions: 1) Do acquisitions by U.S. firms in
the form offoreign direct investment benefit their shareholders? 2) Are there any
differences in wealth gains to acquiring firms with respect to regional and
country location of target firms? 3) Are there any differences in wealth gains to
acquiring firms with respect to their industry affiliation?

Findings of this study indicate that U.S. acquirers experience statistically
significant wealth gains of 0.57 % around the announcement of acquisitions.
The wealth effects depend on both location of target firms and acquirers' indus-
try affiliation. While acquisitions in Europe yield positive wealth gains of
1.53%, acquisitions in Asia/Pacific, North America, and Latin/Central America
regions yield negative wealth gains of -0.39, -1.90, and -0.50%, respectively.
The highest wealth gains to U.S. acquirers occur when they acquire targets in
France (2.68%) followed by acquisitions in the U.K. (2.09%). Canadian acqui-
sitions, on the other hand, yield significant negative wealth gains (-1.90%). With



Spring 2003 Kiymaz: Wealth Effect 9

respect to industry affiliation, the services industry experiences the highest
wealth gains (3.2%), followed by manufacturing (2.01 %) and food (1.23%)
industries. Acquisitions in mining/extraction (-2.89%), paper products (-2.17%),
and communications (-1.36%) sectors, on the other hand, yield statistically
significant negative wealth gains to acquirers.

The remainder of the paper is organized as follows: Section two reviews the
relevant literature. Section three describes data and methodology employed.
Section four presents and analyzes the wealth effects for U.S. acquirers involved
in foreign direct investment, and the final section concludes the paper.

Literature Review

The question of whether stockholders reward firms that increase their foreign
involvement continues to be a focus of attention in finance literature. Most studies
in this area have been concerned with performance of multinationals, which may be
viewed as a portfolio of internationally diversified assets, relative to the perfor-
mance of domestic firms. The empirical evidence is inconclusive and unable to show
that multinational involvement enhances value of firm. If capital markets are seg-
mented internationally or if it is more costly for individuals to obtain portfolio
diversification directly, international corporate diversification may increase the
value of firms. Adler and Dumas (1975) argue that diversification by multinational
firms may provide a service to investors, which may not be available when capital
markets are not fully integrated. Thus, theoretically as a form of international
diversification, multinational acquisitions may be value-enhancing activities. Agmon
and Lessard (1977) suggest that investors can achieve their international diversifi-
cation objectives by holding multinational stocks. Brewer (1981) tests whether there
is any difference between the performances of domestic and multinational firms and
reports no statistical difference in the risk-adjusted performance of domestic and
multinational firms. Fatemi (1984) reports no difference in the rate of return realized
by the shareholders of multinational firms relative to those purely domestic firms
except when multinational firms operate in competitive foreign markets. Hisey and
Caves (1985) show that the choice between related and unrelated acquisitions bears
little relation to the acquirer's base activity in the U.S. but it is somewhat affected by
transaction costs and the firm's previous experience in the host country.

Doukas and Travlos (1988) investigate the impact of corporate
multinationalism, through foreign acquisition, on the market value of the firm in
an attempt to provide evidence on whether foreign direct investment .~~ a wealth-
increasing corporate decision. The empirical findings indicate that shareholders
of internationally expanding domestic firms experience insignificant positive
abnormal returns at the time of announcement of the acquisition. Conn and
Connell (1990) analyze the effects that international mergers have on sharehold-
ers of participating firms in U.S.-U.K. mergers and show that both U.S. and U.K.
acquirers experienced either positive or normal returns in the year preceding the
month of first public announcement of the merger.



10 Journal of Business Strategies Vol. 20, No. I

Harris and Ravenscraft (1991) examine direct foreign investment by studying
U.S. firms acquired during the period 1970-1987. The findings indicate that
cross-border takeovers are more frequent in research and development intensive
industries than are domestic acquisitions, targets of foreign buyers have signifi-
cantly higher wealth gains than do targets of U.S. firms, and while cross-border
effect on wealth gains is not we)] 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. Cebenoyan,
Papaionnou, and Travlos (1992) investigate the wealth effects of the announce-
ment of acquisition bids made by foreign bidders to U.S firms, and compare it
with domestic takeovers. The results indicate that the market competition vari-
able is the most dominant and consistent explanation of the difference in wealth
gains between foreign and domestic takeovers of U.S. firms. Kang (1993) and
Pettway, Sicherman, and Spiess (1993) investigate mergers between Japanese
and U.S. firms and find significant wealth gains for both Japanese bidders and
U.S. targets.

Cakici, Hessel, and Tandon (1996) compare wealth effects of U.S. bidders acquir-
ing foreign firms with those of foreign bidders acquiring U.S. firms. They find
significant wealth gains to both groups of bidders. Kiymaz and Mukherjee (2000)
also report significant wealth gains to U.S. bidders and show that wealth effects are
inversely related to the degree of economic co-movement between the two coun-
tries. Milman, D' Mello, Aybar, and Arbelaez (200 I) show that many Latin American
countries use acquisitions in the U.S. as an effective way of competing in the global
environment. Kiymaz and Mukherjee (200 I) examine the changes in risk of U.S.
firms involved in cross-border acquisitions. The results show that the risk of U.S.
firms declines and its level of significance varies across countries. Gleason, Mathur,
and Singh (2000) examine the wealth gains from the acquisitions offoreign divested
assets by U.S. firms. The results indicate that the market views these divestments as
value generating activities. Ueng, Kim, and Lee (2000) provide evidence of wealth
gains from international joint ventures. The findings indicate that shareholders of
U.S. multinational firms benefit from such activities. These benefits are directly
related to the level of ownership.

Data and Methodology

Table I reports the U.S. foreign direct investment during the 1994-2000
period. The amount of FDI has increased sharply from $33 billion to $66
billion. The rapid increase in FDf flows has been accompanied by increasing
portion of these FDI being directed to developing countries. For example,
Europe's share declined from 70% in 1994 to 50% in 1999 while Latin
America's share increased from 15% to 25% during the same time period.
The U.K. receives the most foreign direct investment by U.S. firms followed
by Canada and Germany.



Spring 2003 Kiymaz: Wealth Effect 11

Table 1
US foreign direct investment abroad

Panel A: Foreign direct investment with respect to regionsJcoumries (Millions oldollars)

1994 1995 1996 1997 1998 1999 2000

Europe 22,608 27,073 14,641 24,220 38,681 39,044 44,795
Germany 2,877 2,539 479 1,040 2,414 1,232 2643
France 2,950 V~59 NA 1,405 2,594 952 966
Netherlands 3,838 1,238 1,428 2,939 4,776 -299 1081
UK 3,808 8,312 5,312 14,617 24,242 26,740 25,197
Others 9,135 12,125 7,422 4,219 4,655 10,419 14,908

Asia Pacific 3,768 5,224 2,918 5,422 7,923 9,775 4,667
Australia -56 3,546 2,126 212 4,363 2,375 367
Japan 486 418 -1,325 103 2,138 2,262 1,891
Others 3,338 1,260 2,117 5,107 1,422 5,138 2,409

Latin/Central
America 4,974 5,908 5,565 8,682 16,506 20,345 11,394

Argentina 522 859 98 921 1,152 1,189 629
Mexico 1,678 1,273 698 2,398 2,836 1,212 1,444
Brazil 370 NA 1,934 2,962 3,944 4,952 1,945
Venezuela 16 NA NA NA 259 581 2,035
Other 2,388 3,776 2,835 2,401 8,315 12,411 5,341

North America 1,442 2,023 2,143 860 6,043 10,160 3,339
Canada 1,442 2,023 2,143 860 6,043 10,160 3,339

Panel B: Foreign direct investment with respect to industry classifications (Millions (~l
dollars)

1994 1995 1996 1997 1998 1999 2000

All Industries 33,659 40,485 27,533 40,792 72,447 79,183 66,088
Petroleum 1,108 591 -796 4,905 7,319 5,072 3,926
Food 852 751 501 2,713 2,277 1,050 798
Chemical 1,635 12,072 773 556 2,105 2,208 781
Machinery/
Equipment 1,036 1,470 420 D 1,576 1,892 1,559
Electronics -501 2,620 529 899 1,868 473 9,908
Wholesale trade 6,727 574 2,513 364 1,846 -4,923 1,868
Financials 10,801 8,317 9,028 16,561 25,456 32,035 19,710
Services 4,126 1,069 115 1,566 5,924 5,757 1,698
Others 7,875 13,021 14,450 13,228 24,076 35,619 25,840

Source: Bureau of Economic Analysis.

The sample selection for empirical study is outlined in Table 2. The initial

sample includes all foreign acquisitions of U.S. firms reported in Merger and



12 Journal of Business Strategies

Table 2
Sample selection

Vol. 20, NO.1

This table presents the sample selection and the selected characteristics of U.S. acquirers.

Panel A: Sample selection

U.s. acquirers
M&As reported
Less: No news
Less: No data
Net Sample

Panel B: Frequency of sample by country/ret:ion

Country and regions # of acquisitions

Europe 90
Germany 9
France 9
Netherlands 9
UK 49
Others 14

Asia/Pacific 19
Australia II
Asia 8

Latin/Central America 20
Mexico 7
Latin America 13

North America 19
Canada 19

Total 148

Panel C: Frequency of sample by industry classification

Industry classification # of acquisitions

SIC 10-13 Mining/Extraction 8
SIC20-21 Food 14
SIC26-27 Paper Products/Publishing 8
SIC28-29 ChemicalslPetroleum 17
SIC32-38 Manufacturing 35
SIC48 Communications 15
SIC49 Utilities 23
SIC50 RetailfTrade 6
SIC60 Financials 14
SIC70 Services 8
Total 148

186
22
26
148

% of acquisitions

60%
6%
6%
6%

33 %
9%
13%
8%
5%
14%
5%
9%
13 %
13 %

100%

% of acquisitions

5%
10 %
5%
12%
24%
10%
16%
4%
9%
5%

100%



Spring 2003 Kiymaz: Wealth Effect 13

Acquisitions almanac issues during the period of 1989-2000. The following
screening criteria are then applied to the initial sample. First, firms in the final
sample should be traded on the NYSE or AMEX. This is to ensure that stock
returns of firms can be retrieved from the Center for Research in Security Prices
(CRSP) database. Second, firms with incomplete data on the CRSP are elimi-
nated. Finally, firms with no news in the Wall Street Journal are eliminated. The
net sample consists of 148 firms.

The sample includes acquisitions in Europe (France, Germany, Netherlands,
the UK, Italy, Switzerland, Sweden, Ireland, Norway, Belgium, and Denmark),
in Asia/Pacific (Australia, Japan, Pakistan, and Hong Kong), in Latin/Central
America (Argentina, Brazil, Venezuela, Mexico, and Peru) and in North America
(Canada), Panels Band C of Table 2 show selected characteristics of the acquir-
ing firms. In terms of the acquired firm's location Europe ranks first with 90
acquisitions (60%), followed by Latin/Central America with 20 acquisitions
(14%), In term of country, the U.K. ranks first, with 49 acquisitions (33%) and
Canada is a distant second with 19 acquisitions (13%).

Panel C of Table 2 reports the frequency of sample by industry classification.
Of the total 148 acquisitions, 35 (24%) are in manufacturing (SIC32-38), 23 are
in utilities (SIC49) (16%), and 17 (12%) are in chemicals/petroleum (SIC28-29)
industries.

Standard event study methodology is used to measure the wealth effect of
acquisitions announcements on acquiring firms. The following single-market
model is employed in parameter estimation:

(1)

Where:

R. =/,/
R =D.r
~i,D =

U =I
£. =

'.I

the rate of return on security i on day t,
the rate of return on the market value weighted rRSP Index,
the slope of the regression line of the firm i's returns against the
returns on the market value CRSP Index,
the intercept term,
the residuals.

An abnormal return (wealth effect) for common stock of firm i on day t is
defined as:

~

AR = R - R
t.t /,1 U

where,

R. = u. + ~ D • R[r,f I I, J,I

(2)

(3)



14 Journal of Business Strategies Vol. 20, No. I

in which U
j
and ~i,I) are estimated market model parameters obtained by using

the pre-estimation period (t = -316 to t = -61).1
The cumulative abnormal returns of firm i (CAR) are obtained by accumulat-

I

ing ARi,t's over a k-trading period running from day d[ to day d
2

:

d,

CAR,= DR,,{ (4)

For a sample of N firms, a daily abnormal return for each day t is obtained:

N

AAR{ = (£). LARu (5)

Finally, the Cumulative Average Abnormal Returns (CAR) for a sample of N
firms across a k-day event window are calculated as follows:

CAR =
d, N

(£) ·LLAR",
I=d, ;=/

(6)

The expected values of abnormal returns and average abnormal returns are zero
in the absence of abnormal performance. 2

Empirical Results

The impacts of foreign acquisitions announcements on U.S. acquiring firms are
reported in Table 3 through Table 5. First, the behavior of abnormal returns is
displayed for the entire sample of 148 acquiring firms. Panel A, Table 3, outlines
average daily abnormal returns (AARs) during the 21 days surrounding the an-
nouncement of acquisitions (t = 0). The AARs are 0.44% on Day -I and are
statistically significant at the I % level. This would indicate that foreign direct
investments of US firms are perceived to be good news on average. The positive and
statistically significant AARs on Days -4 and -2 might imply information leakage
prior to the announcement. Panel B, Table 3, reports six different cumulative abnor-
mal returns (CARs) for the acquiring firms. For (-1,0) and (-1,1) windows, the CARs
for the entire target sample are 0.57% and 0.50% on average. Both are statistically
significant. Most firms experience positive wealth gains from an acquisition an-
nouncement. CARs in the remaining windows are all positive but not statistically
significant. Overall results show that markets evaluate U.S. acquiring firms involve-
ment in foreign direct investment positively.

The sample is then grouped into sub-samples based on the geographic loca-
tion of the target firms in terms of both regions and countries. Table 4 reports



Spring 2003 Kiymaz: Wealth Effect 15

Table 3
Abnormal returns surrounding foreign acquisitions announcements

of US acquirers

This table presents the abnormal return to U.S. aequircrs surrounding the announcement of cross-
border acquisitions. The null hypothesis is that the average abnormal returns are nut statistically

different from zero.

Panel A: Average daily abnormal returns (AARs)

U.S. acquirers

Days AARs (0/0) t~value Positive: Negative Generalized Sign test

-10 0.11 1.08 73:75 0.33
-9 -0.07 -1.15 67:81 -0.65
-8 -0.18 -0.64 74:74 0.50
-7 0.16 0.88 71:77 0.00
-6 0.22 1.30 73:75 0.33
-5 -0.26 -1.60' 64:84 -1.15
-4 0.25 2.01" 81:67 1.65*
-3 0.01 -1.16 67:81 -0.65
-2 0.37 2.04" 72:76 0.17
-I 0.13 0.44 69:79 -0.33
a 0.44 3.09**' 80:68 1.48

+1 -0.07 -0.22 64:84 -1.15
+2 -0.15 -0.57 59:89 -1.97'
+3 -0.17 -1.40 59:89 -1.97'
+4 0.22 1.60' 80:68 1.48
+5 0.12 1.09 74:74 0.50
+6 0.06 0.03 68:80 -0.49
+7 -0.08 -0.01 61:87 -1.64'
+8 -0.13 -0.88 73:75 0.33
+9 0.09 0.19 70:78 -0.16

+10 0.16 1.07 75:73 0.66

Panel B: Cumulative abnormal returns (CARs)

U.S. acquirers

Windows CARs (0/0) t-value Positive: Negative Generalized Sign test

(-1,0) 0.57 2.50" 78:70 1.15
(-I, I ) 0.50 1.91' 75:73 0.66
(-5,5) 0.90 1.62 81:67 1.65'
(-10,1 0) 1.23 1.58 75:73 0.66
(-10,2) 0.96 1.53 82:66 1.81 '
(+1,6) 0.02 0.22 73:75 0.33

.. , " and' indicate statistical significance at the 1%, 5% and 10% levels, respectively.



16 Journal of Business Stratef?ies Vol. 20, No. I

both the daily average and cumulative abnormal returns for acquiring firms
surrounding announcement date. In terms of regions, U.S. direct investments in
Europe yield the highest positive wealth gains. In this region, AARs are 1.06%
and 0.47% in Days -1 and 0 respectively. CARs for windows (-1,0) and (-10,2)
are 1.53% and 2.48% respectively. These results are statistically significant at
1% level. Firms with acquisitions in the remaining regions (Asia/Pacific, North
America, and Latin/Central America) experience negative wealth gains. For
example, the daily average abnormal returns on Day -1 are -0.69%, -0.88% and
-0.32% in each ofthe regions. Similarly, CARs for window (-1,0) are -0.39% for
Asia/Pacific region, -1.90% for North American region, and -0.50% for Latin/
Central American region.

With respect to the locations of target firms, the wealth effects exhibit signifi-
cant variations as well. The highest wealth gains are obtained in acquisitions in
France and the U.K. For example, acquisitions in France yield wealth gains of
2.68% followed by wealth gains of 2.05% in U.K. by using CARs (-1,0) window.
Acquisitions in Canada, on the other hand, bring negative wealth gains of
-I. 90% during the same event window.

Overall, the U.S. acquiring firms experience positive wealth gains in their
involvement in cross-border acquisitions and the magnitude and level of signifi-
cance vary from one country/region to another. The highest gains occur when
U.S. firms acquire French firms followed by acquisitions of U.K. firms. Acqui-
sitions in other regions and countries yield negative wealth gains.

Table 5 reports both average and cumulative abnormal returns for acquiring firms
according to industrial classification. The findings show variations in wealth gains
to acquiring firms. The highest wealth gains occur to firms in the service industry
(SIC70) with an average abnormal return of2.17% on the day of announcement. The
second highest abnormal returns are observed in the manufacturing (SIC32-38)
industry. The 10westAARs occur in the mining/extraction industry (SIC I0-13) with
-2.65%, followed by financials (SIC60-67) with -1.04%. Cumulative abnormal
returns exhibit similar patterns. Six of the ten industry sub-groups experience posi-
tive wealth gains. For example, for the window (-1,0), the highest wealth gains are
in the service industry (SIC70) with a cumulative abnormal return of 3.22% fol-
lowed by manufacturing (SIC32-38) with 2.01 %. The lowest CARs in (-1,0) win-
dow are observed in mining/extraction (SIC 10-13) industry with -2.89% followed
by paper products/publishing (SIC26-27) with -2.17%.

Overall, this study finds statistically significant wealth gains accruing to U.S.
firms involved in foreign direct investment. The magnitude of gains and signifi-
cance level vary for each region, country, and industrial affiliation. These find-
ings are in line with most of the recent studies but are not supported by earlier
studies. For example, while Doukas and Travlos (1988) and Conn and Connell
(1990) report insignificant wealth gains to U.S. acquirers, Kang (1993), Pettway,
Sicherman, and Spiess (1993), Cakici, Hessel, and Tandon (1996), and Kiymaz
and Mukherjee (2000) find statistically significant positive wealth gains occur-
ring to U.S. acquirers. This study further finds that the wealth effects do vary



Spring 2003 Kiymaz: Wealth Effect 17

Table 4
Abnormal returns to U.S. acquirers by region/country location

of foreign acquisitions

This table presents the abnormal return to U.S. firms surrounding the announcement of cross-border
acquisitions based on region/country location of targets.

Average Abnormal Returns Cumulative Abnormal Returns
(AARs) (%) (CARs) (%)

Window Window Window
Day (-1) Day (0) Day (+1) (-1,0) (-/0,+2) (+1,+6)

Europe: 0.47 1.06 -0.02 1.53 2.48 0.74
(2.37)'" (5.27)'" (0.49) (5.41) '" (3.35)'" ( 1.63)*

Gennany -0.45 0.50 1.53 0.06 0.20 5.35
(-0.43) (1.04 ) (1.99)" (0.43) (0.33) (3.04)'"

France 0.66 2.02 0.52 2.68 5.56 1.33
( 1.15) (3.51)*" (1.40) (3.30) '" (3.23)"" ( 1.25)

Netherlands-O.91 0.38 0.99 -0.53 2.78 0.47
(-1.28) (0.50) ( 1.85)* (-0.55) (1.25) (0.06)

UK 0.64 1.41 -0.44 2.05 2.32 -0.34
( 1.93)* (4.75)'** (-1.63)* (4.72)'** (1.53) (-0.12)

Others 1.22 0.04 -0.52 1.26 2.33 1.34
(2.85)'" (0.43 ) (0.09) (2.32) " (1.77)* (0.87)

Asia Pacific -0.69 0.30 -0.31 -0.39 -2.86 -0.17
(-2.(7)" (0.87) (-1.55) (-0.85) (-2.48)*" (-OJ)) )

Australia -0.65 0.34 -0.27 -0.31 -1.64 -0.31
(-1.25) (0.58) (-1.(0) (-0.47) (-1.34) (-0.10)

Others -0.74 0.25 -0.38 -0.50 -4.54 0.01
(-1.73)* (0.66) (1.21 ) (-0.75) (-2.25)** (0.10)

North America:
Canada -0.88 -1.02 -0.02 -1.90 -0.60 -2.00

(-1.83)* (-1.82)* (0.23) (-2.58)*" (0.09) (-1.28)

Latin/Central
America 0.32 -0.81 -0.11 -0.50 -0.79 -1.08

(-0.02) 1(-1.86)* (-0.37) (-1.33) (-0.61 ) (-1.60)*
Mexico -0.45 -0.69 -0.38 -1.14 -2.07 -1.27

(-0.82) (-1.32) (-0.72) (-1.51) (-1.34) (-1.24)
Latin

America 0.73 -0.88 0.03 -0.15 -0.10 -0.98
(0.57) (-1.34) (0.07) (-0.54) (0.23) (-1.07)

.... Hand' indicate statistical significance at the 1%, 5% and 10% levels, respectively.



18 Journal of Business Strategies Vol. 20, No.1

Table 5
Abnormal returns to U.S. acquirers by industrial classification

This table presents the abnormal return to u.s. firms surrounding the announcement of cross-border
acquisitions based on primary standard industry classification of acquircrs.

Industries Average Abnormal Returns Cumulative Abnormal Returns
(AARs) (%) (CARs) (%)

Window Window Window
Day (-1) Day (0) Day (+1) (-1,0) (-10,+2) (+1,+6)

SICIO-13 -0.24 -2.65 -0.04 -VN 1.35 -4.08
(-0.30) (-3.29)'** (0.11 ) (-2.54)" (0.86) (-2.20)"

SIC20-21 0.01 1.22 0.60 1.23 1.49 0.28
(0.13) (2.16)" ( 1.65)' ( 1.62)' (0.77) (0.20)

SIC 26-27 -1.56 -0.61 -0.33 -2.17 -4.98 ..,1.28
(-1.90)' (-0.72) (-0.45) (-1.85)' (-1.04) (0.60)

SIC28-29 0.66 0.03 -0.20 0.69 0.32 0.79
( 1.62)' (0.26) (-0.32) (1.33) (0.06) (0.56)

SIC32-38 0.65 1.36 -0.09 2.01 1.60 0.98
(2.51 )'** (4.66)'" (-D.08 ) (5.07)'** (1.56) ( 1.12)

SIC48 -0.66 -0.70 -0.50 -1.36 1.41 -1.04
(-2.17)'** (-1.37) (-0.71 ) (-2.50)'* (0.32) (-0.52)

SIC49 0.44 0.57 -0.24 1.01 0.29 0.78
(0.51 ) ( 1.33) (-1.15) ( 1.30) (0.25) ( 1.42)

SIC50 0.86 1.05 1.42 1.91 5.26 1.15
(0.23) (0.39) ( 1.23) (0.44) (0.61 ) (0.07)

SIC60 -1.04 0.03 -0.35 -1.01 -0.20 -1.84
(-2.37)** (0.34) (-0.63) (-1.43) (-0.45) (-1.46)

SIC70 1.05 2.17 0.07 3.22 3.95 -1.15
(1.36) (3.12)*** (0.54) (3.17)*** (1.60)* (-0.72)

*H". and * indicate statistical significance at the 1%.5% and 10% levcls, respectively.

with location of target firms and acquirers' industry affiliation. While acquisi-
tions in Europe yield positive wealth gains, acquisitions in Asia/Pacific, North
America, and Latin/Central America regions yield negative wealth gains. The
wealth gains are highest when acquisitions take place in France and the U.K.,
and lower when it takes place in Canada. Firm's industry affiliation also appears
to be a source of variation in wealth gains with firms in the services industry
experiencing the highest wealth gains and firms in mining/extraction industry
having the lowest wealth gains.

Summary and Conclusion

The U.S. foreign direct investments have increased sharply in recent years.
Foreign direct investment in the form of mergers and acquisitions (M&As)



Spring 2003 Kiymaz: Wealth Effect 19

constitutes an important part of foreign direct investment by U.S. firms.
This study investigates the wealth effects for U.S. firms involved in cross-

border acquisitions of foreign firms during the period of 1989-2000. The
sample consists of 148 acquisitions in four different regions and 24 different
countries. Overall findings indicate that U.S. acquirers experience statisti-
cally significant wealth gains of 0.50 % on the day of announcement. The
wealth gains further differ with respect to the location of target and the
industry affiliation of acquirers. Acquisitions in Europe yield the highest
wealth gains of 1.53% while acquisitions in Asia/Pacific, North America,
and Latin/Central America regions yield statistically significant negative
wealth gains. The highest wealth gains to U.S. acquirers occur when they
acquire targets in France (2.68%) followed by acquisitions in U.K. (2.05%).
Acquisitions in Canada, on the other hand, yield negative significant wealth
gains (-1.90%). There are also differences in wealth gains with respect to
industry affiliation of acquirers. The highest wealth gains are observed in
services industry (3.22%) followed by acquisitions in manufacturing (2.0 1%)
and food (1.23%) industries. Acquisitions in mining/extraction (-2.89%),
paper products (-2.17%), and communications (-1.36%) sectors, on the other
hand, yield statistically significant negative wealth gains.

Generally, this study finds that foreign direct investments by U.S. firms in the
form of acquisitions are wealth-creating activities for U.S. firms. The magnitude
and the level of significance of wealth gains vary from one countrylregion to
another. Furthermore, the benefits obtained from these acquisitions are different
for each sector.

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I Most event studies employ a pre-estimation period to estimate the market
model parameters. The length of estimation period varies between 180 and
270 days. This study uses 255 days to estimate model parameters and 60 days
for event-window to analyze wealth effects.

2 The test of significance is performed by following Brown and Warner ( 1985)
and is not illustrated here.



22 Journal (~lBusiness Strategies Vol. 20, No.1

Dr. Halil Kiymaz is Assistant Professor of Finance at University of Houston -
Clear Lake. He obtained his Ph.D. from University of New Orleans. He also
holds the CFA designation. Prior joining the UHCL faculty, he has served on the
faculty of Bilkent University in Turkey. His research has been published in
Journal of Banking and Finance, Financial Review, Journal of Economics and
Finance, Applied Financial Economics, Journal of Multinational Financial Man-
agement, Global Finance, Journal of Research in Finance, Journal of Emerging
Markets, and Journal of Economics and Business Studies, among others.


	Wealth Effect for U.S. Acquirers From Foreign Direct Investments