Mind the Gap: How Institutional Distances Impact Deal Premiums in Cross-Border Acquisitions

Abstract

This thesis investigates how country-specific factors shape the premiums paid in cross-border acquisitions (CBAs), with a focus on the role of institutional and geographic differences between acquirer and target countries. Guided by New Institutional Economics (NIE), the study analyzes 1,110 acquisitions completed between 2009 and 2019 using fixed-effects regression models. Four dimensions of bilateral distance are examined: informal institutional distance, political distance, economic distance, as well as geographic separation. The findings offer mixed support for the “distance discount effect”, which is derived from NIE’s underlying logics and assumptions and posits that greater institutional distance increases uncertainty, complexity, and risk, thereby lowering deal value and premiums. While political and economic distances significantly reduce deal premiums, indicating that acquirers rationally discount for heightened uncertainty, risk, and cost, informal institutional trust distance, measured using social trust, shows no effect. This non-significant relationship holds even when alternative proxies based on Hofstede’s dimensions are used. These results suggest that while informal institutions may play a role in post-acquisition integration, they do not appear to be systematically incorporated into the acquirer’s valuation logic at the pricing stage. However, it may also reflect the difficulty of capturing intangible, context-dependent informal effects through existing quantitative measures. Notably, geographic distance is positively and significantly associated with deal premiums, contrary to NIE expectations. This result implies that more distant targets may be receiving higher premiums due to strategic ambition or cognitive biases, pointing to possible limitations of NIE’s assumptions and the potential value of incorporating behavioral and strategic perspectives. This study contributes to the understanding of how country-specific factors influence acquisition premiums and offers practical guidance for dealmakers navigating uncertainty in CBAs. Overall, the thesis highlights the importance of considering both institutional context and firm-level attributes and encourages a more integrated, multi-theoretical approach to analyzing cross-border valuation decisions.