Private information, institutional distance, and the failure of cross-border acquisitions: Evidence from the banking sector in Central and Eastern Europe
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In this paper, we develop an information theory-based framework about cross-border acquisitions in the financial
intermediation industry. We argue that even though “soft” information embedded in customer relationships
of local banks can, in principle, help multinational banks (MNBs) overcome informational disadvantage
in host countries, the cost of verification of this private information may, paradoxically, make local
banks with significant customer relationships unattractive for cross-border acquisition. Further, we propose that
the relationship between the amount of customer information embedded in an incumbent bank and the likelihood
of its acquisition by a MNB is modified by the institutional distance between the home and host countries
of the MNB. Specifically, the strength of the negative relationship increases with institutional distance between
home and host countries because the verification cost of private information increases with institutional distance.
Our hypotheses find support in the context of Central and Eastern Europe.
Keywords
HG Finance