Corporate acquisitions and firm-level uncertainty: Domestic versus cross-border deals

This paper investigates how the announcement of acquisitions affect the uncertainty that financial markets perceive about acquiring firms. We use data for publicly-listed firms in the UK between 2004 and 2017 and employ a matching estimator combined with difference-in-differences to address the endogenous selection of firms into acquisitions. While acquisition announcements do not result in a significant change in the volatility of stock returns of acquiring firms across our whole sample, this result hides substantial heterogeneity. Our main finding is that the impact of acquisitions on uncertainty is crucially shaped by a deal's geographic scope-i.e. whether the takeover involves a target in the same country or abroad. Domestic deals reduce the volatility of acquirers' returns by 5% on average one quarter after the announcement, while acquiring a foreign firm increases volatility by a similar magnitude. The heightened volatility resulting from cross-border transactions is primarily driven by acquisitions in industries characterized by high investment irreversibility and foreign markets where barriers to investment are higher. Conversely, the volatility reduction following domestic acquisitions is more pronounced in industries with low irreversibility. Additionally, characteristics of the deal itself, such as the relative size of the acquisition, the payment method, and whether the deal achieves majority control of the target, also play an important role in mediating the effect of acquisitions on volatility.