To study the relation with cross-border M&As, we further collect information on 11,531 cross-border M&As. Our analysis controls for a range of country-specific factors, such as those related to economic growth, and includes country-pair and year-fixed effects.
The main finding of this paper is the volume of inbound cross-border deals. In host countries originating from visiting countries increases significantly in the year of the state visit and the subsequent three years. At the aggregate level, the number of cross-border acquisitions increases by 3.5% in the visit year and by 2.9%, 5.1%, and 3.5% in the following three years, respectively. Interestingly, we do not find elevated M&A activity between the two countries before the state visit. Corporate takeover activity is only after heads of state visit foreign countries and not before.
Further analysis shows that the effects are on corporations from visiting countries. If state visits coincide with particular economic circumstances of the host or visiting country, such as an improved economic outlook. Then we would expect overall M&A activity in the host or visiting country to be elevated. We find that this is not the case. For example, our results indicate the volume of domestic deals in the year of the visit. And the following three years do not differ from other years either in the host or visiting country. Similarly, we find that there is no difference in the volume of inward (outward) cross-border deals. In host (visiting) countries from countries other than the visiting (host) country. These findings suggest that the observed increase in deals cannot easily be attributed to other forces that make the host country attractive to (foreign) deals.
Importantly, the volume of inbound cross-border deals in host countries originating. Visiting countries also increases significantly for visits that are not accompanied by new economic deals. We further find an influence of leadership changes after a state visit. More specifically, we document that the relation between a state visit and M&A activity is significant when the head of state visits the host country shortly after the visit.
To provide more insight into whether the effect of state visits on cross-border M&A activity is causal. We employ instrumental variable analysis.
The preference of tourists is to be a valid predictor for the occurrence of a political state visit. While a larger travel flow between countries can influence bilateral investment. The total number of visiting tourists across all countries around the world is not directly influenced by M&A deals between a specific country pair. The results of the instrumental variable analysis point towards a causal effect from state visits to M&As.
We study multiple mechanisms that could make mergers and acquisitions more attractive after a state visit. First, corporate actors regularly directly participate in state visits. On such visits, the heads of state of both the visiting and host countries are typically accompanied by many of their countries’ corporate leaders.
Overall, our results highlight a new determinant of cross-border M&As. Cross-border M&As represent 38% of global M&A activity and substantial capital reallocations. Instead of examining ‘stale’ country-level determinants of M&A. This paper offers new insight into the dynamics of M&A activity and the role that heads of state can play in affecting this activity. Compared to most types of bilateral trade, mergers, and acquisitions are complex investment decisions. Subject to both legal and financial complexities.