Cross-border Acquisitions and Labor Regulations
Do labor regulations influence the reaction of stock markets and firm profitability to cross-border acquisitions? We discover that acquiring firms enjoy smaller abnormal stock returns and profits when targets are in countries with stronger labor protection regulations, i.e., in countries where laws, regulations, and policies increase the costs to firms of adjusting their workforces. These effects are especially pronounced when the target is in a labor-intensive or high labor-volatility industry. Consistent with labor regulations shaping the success of cross-border deals, we find that firms make fewer and smaller cross-border acquisitions into countries with strong labor regulations.
We received helpful comments from Douglas Arner, Florencio Lopez-de-Silanes, Yona Rubinstein, David Sraer, Bernard Yeung and seminar and conference participants at the University of California, Berkeley, the HKIMR-HKU International Conference on Finance, Institutions and Economic Growth and the 2015 CEIBS finance conference in Shanghai. We thank the Clausen Center for International Business and Policy at the University of California, Berkeley, for financial support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.