While most work has focused on the U.S. market, it is interesting to explore the reference point effect
on cross-border acquisitions in the U.K. public targets. First, the high level of competitiveness in the
U.K. market entitles its targets to greater bargaining power, which makes the reference point effect
pronounced. Danbolt (2004) affirm that the cross-border target effect means that U.K. targets are
outperformed in cross-border acquisitions rather than in domestic counterparts due to risk
diversification. In line with his work, Alexandridis et al. (2010), by investigating a sample of global
M&A activity over the period of 1990 and 2007, found that the level of competition increases with
target abnormal returns and the offer premium, and decreases with bidder abnormal returns. Their
results show that when the market is more competitive, targets are more likely to translate their
bargaining power into benefits. It is generally believed that cross-border bidders have less information
advantage than domestic bidders, which reduces their bargaining power over their targets. With this
in mind, U.K. targets are more likely to ask for an offer price based on a reference price favouring
their shareholders from cross-border bidders than domestic bidders.
Secondly, less severe of agency conflicts between the manager and the shareholder in the U.K. could
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governance system in the U.K. is consistent with the U.S. (La Porta et al. 2000), yet the U.K. has a
better corporate governance system in relation to M&As compared with the US. Armour and Skeel
(2007) in their review of U.S. and U.K. takeover regulations conclude that the U.K. has self-regulation
takeover regulations which are strongly orientated towards the shareholder’ interests, whereas the
U.S. law system entitles managers to absolute discretionary power over the firms. In addition, in the
context of takeover defences the authors suggest that the U.K. takeover code implicitly bans any
“frustrating actions” against their shareholders, which is different from the United States. Thus,
takeover regulations in the U.K. can potentially reduce the conflicts of interests between the manager
and the shareholder. The bargaining power of target managers is enhanced under more stringent
regulations and target managers can require higher offer premiums from outward bidder managers in
M&As.
The corporate governance system is firmly rooted in the legal environment of a country. Research
has established some contradictory findings in relation to the divergence of the legal environment
effect on shareholder valuation in cross-border acquisitions. Moeller and Schlingemann (2005)
analysed bidders’ acquisitions of the worldwide targets over the period of 1985 and 1995 and found
that bidders tend to pay higher offer premiums to targets with weaker legal environment compared
with the United States. Thus, targets with more information asymmetry and poorer corporate
governance system tend to accept lower offer premiums, which leaves the bidders opportunities to
explore the benefits.33
33 Addressing the U.K. market, Antoniou et al. (2008) noted that the lower offer premium does not benefit bidders.
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Hagendorff et al. (2008), analysing the bidder returns of financial firms between 1996 and 2004 in
the context of the U.S. and Europe, found that target countries with a weaker legal environment are
more likely to accept fewer offer premiums. Unlike Moeller and Schlingemann (2005), Hagendorff
et al. (2008) argued that information asymmetry and severe agency problems lead to a decrease in
the offer premium.
Martynova and Renneboog (2008) studied a sample of listed bidders’ acquisitions of both listed and
unlisted targets in Europe during the fifth M&A wave. They revealed bidders obtain positive returns
when acquiring targets regardless of their legal environment. They ascribed targets in stronger legal
environment compared with bidders to the bootstrapping effect that bidders have incentives to get
access to better corporate governance system. Based on their study, targets in a strict legal
environment are expected to have greater bargaining power than those in a less strict legal
environment.
On the whole, studies have highlighted how the legal environment impacts the bargaining power of
both the bidder and the target in the context of M&As. However, results are mostly driven in the U.S.
or the European sample in different sample periods (Moeller and Schlingemann, 2005; Hagendorff et
al., 2008, Martynova and Renneboog, 2008). Little has been done relating to the issue of the U.K.
market. Given that the U.K. is a more active and competitive market than that of any other country in
the world due to the stringent shareholder protection and legal environment (Moeller and
Schlingemann, 2005;Alexandridis et al., 2010), target managers are entitled to greater bargaining
power and tend to demand higher offer premiums accordingly. Bidders from countries with relatively
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96
exchange for stronger shareholder protection. With a higher level of information asymmetry, bidders
are more likely to be misled by the value of the target, thus valuing targets based on readily available
information. Results regarding the reference point effect being more pronounced on cross-border
M&As.