Dealing with information asymmetry in cross-border acquisitions: Distance matters

It is well known that cross-border acquisitions are challenging as acquiring firms lack knowledge both of the target and of the host environment. We examine the strategic choices acquirers can make prior to the acquisition to mitigate the information asymmetry they face as a result of differences in institutional environments between the acquirer and target and the level of deal complexity. Acquiring firms' can choose to use knowledge acquisition mechanisms, such as equity toeholds and alliances with the target or hire investment banks, as well as use contractual mechanisms such as contingent earnouts. We test our hypotheses on a sample of 1,435 US cross-border acquisitions completed during 1985-2004. Our results suggest that managers are smart in that they take into account the complexities involved in cross-border acquisitions as they make selective strategic choices to alleviate the problem of information asymmetry. More knowledge is costly to acquire and is not always better - not every cross-border acquisitions needs ex ante investments in learning about the environment or the target.