International Mergers and Acquisitions and the Market for Lemons

We propose that the market for international acquisitions may be subject to a double “lemons problem”: because of information asymmetries firms acquired by international buyers tend to be poor performers compared to firms acquired by domestic buyers that again tend to perform worse than firms that are not acquired. We find support for these propositions by comparing international to domestic acquisitions of Danish firms over the period 1990-1997. Foreign firms tend to acquire poorly performing firms measured by return on assets and factor productivity. Moreover, although the relative performance of the internationally acquired firms does improve significantly a couple of years after acquisition, selection-adjusted estimates indicate a negative performance effect of international takeovers. This may be interpreted as an indication of further unidentified adverse selection bias and/or acquirer motives like market and technology access that are traded off for local financial performance.