It Takes Two to Tango: Country-of-Origin Effects and Acquisition Premiums in Cross-Border M&As

Abstract We examine how a firm’s favorability towards the national identity of its acquisition partner affects the acquisition premium. Using a sample of 435 cross-border mergers and acquisitions (M&A) involving firms from 38 countries, we find that the acquisition premiums are lower when: (1) the acquiring firm holds more favorable views of the target firm’s national identity; and (2) the target firm holds more favorable views of the acquirer’s national identity. We also find that information asymmetry amplifies the effect of the acquirer's favorability towards the target firm’s country-of-origin on the acquisition premium. Specifically, country-of-origin favorability exerts a stronger influence on the premium in unrelated acquisitions, where acquirers often lack sufficient information and, consequently, face higher levels of uncertainty. Our findings contribute to research on acquisition pricing by identifying country-of-origin favorability as a previously overlooked determinant of acquisition premiums and by showing that its effects are asymmetric, with target-side favorability exerting a stronger influence than acquirer-side favorability.