Size Effect and Corporate Governance in Cross-Border M&As

We examine a sample of 638 cross-border acquisitions by U.S. public firms from 1996 to 2002. Small acquiring firms earn a statistically significant three-day cumulative abnormal announcement return of 2.33%, while large acquirers earn statistically not significant negative return of 0.27%. The observed acquiring firm size effect is robust regardless of the deal and acquirer characteristics, and sample periods. However, unlike domestic acquisitions, we do not observe a size effect for cross-border acquisitions of public target firms. Using the corporate governance index (G-index) developed by Gompers, Ishii, and Metrick (2003), we find that the observed size effect disappears when the buyers have a good corporate governance system in place. Our results suggest that managerial selfinterest or hubris drives the observed size effect.