Financing strategies and shareholders’ risk in cross border acquisitions in India

Abstract

Purpose

This paper aims to assess the impact of different financing strategies used in the cross-border acquisitions on the shifts in the risk profile of the acquiring companies in India. The purpose is to discern which of the stated modes of payment, viz., cash, stock and earnout, enables an acquiring company in better hedging the risk of adverse selection in cross-border acquisitions.

Design/methodology/approach

Analysis has been conducted by computing unsystematic (alphas, αs) and the systematic (betas, βs) risk of the acquiring companies, for three different estimation periods, that is the pre-acquisition estimation period, the post-acquisition estimation period and the pooled estimation period. The computations of αs and βs, for each company, have been done by using the market model, whereas further analysis of the average αs and average βs has been done by applying analysis of variance and paired sample t-test.

Findings

It has been found that of the three modes of payment, earnouts provide best hedge to the acquiring companies for minimizing the risk of adverse selection in cross-border acquisitions.

Research limitations/implications

The paper recommends earnouts as a prudent strategy for the acquiring companies from India as well as other emerging markets for their future global acquisitions.

Originality/value

This is the pioneering study on analyzing the impact of the different financing strategies on the shifts in the risk profile of acquiring companies.

Citation

Kohli, R. (2015), "Financing strategies and shareholders’ risk in cross border acquisitions in India", International Journal of Commerce and Management, Vol. 25 No. 3, pp. 294-308. https://doi.org/10.1108/IJCoMA-11-2013-0116