Economic Nationalism in Mergers and...

THE JOURNAL OF FINANCE • VOL. LXVIII, NO. 6 • DECEMBER 2013

Economic Nationalism in Mergersand Acquisitions

I. SERDAR DINC and ISIL EREL∗

ABSTRACT

This paper studies government reactions to large corporate merger attempts inthe European Union during 1997 to 2006 using hand-collected data. We documentwidespread economic nationalism in which the government prefers that target com-panies remain domestically owned rather than foreign-owned. This preference isstronger in times and countries with strong far-right parties and weak governments.Nationalist government reactions have both direct and indirect economic impacts onmergers. In particular, these reactions not only affect the outcome of the mergers thatthey target but also deter foreign companies from bidding for other companies in thatcountry in the future.

“Come sta?”1

CORPORATE MERGERS AND ACQUISITIONS are an important part of a market econ-omy. Large firms often enter into a new market through acquisitions of localfirms. If there is excess capacity in a sector, weak firms often exit the economy,not necessarily through bankruptcy, but by being acquired by another firm.When such mergers take place between companies from different countries,national economies become more integrated. Yet, the reaction of governmentsto merger attempts often seems to be motivated by concerns other than compe-tition. In particular, government interventions often appear to depend on the“nationality” of the acquiring company.

Nationalist interventions by domestic governments do not simply take theform of opposition to foreign acquirers. They also include support for domestic

∗Serdar Dinc is with Rutgers Business School and Isil Erel is with the Ohio State University,Fisher College of Business. We would like to thank L. Ivan Alfaro, Ji-Woong Chung, and JohnSedunov for providing excellent research assistance. We are grateful to Christopher Wendt forsharing his voting data. We also would like to thank the referee; the Associate Editor; KennethAhern; Campbell Harvey (the Editor); Randall Morck; John Parsons; Roberto Rigobon; PaolaSapienza; Antoinette Schoar; Rene Stulz; Michael Weisbach; Christopher Wendt; and seminarparticipants at 2012 American Finance Association Meetings, Brandeis University, Chicago Fed,Federal Reserve Board of Governors, Georgetown University, MIT, Ohio State University, Philadel-phia Fed, Rutgers University, and University of Houston for comments. The usual disclaimerapplies.

1 This quote is French President Charles de Gaulle’s greeting in Italian to Francois Michelin,who was summoned to the presidential office upon rumors that he was about to sell the Frenchcarmaker Citroen he controlled to Italian Fiat. Shortly thereafter it was arranged that Peugeot,another French carmaker, would acquire Citroen (see Betts (2001)).

DOI: 10.1111/jofi.12086

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acquirers to create domestic companies that are considered too big to be ac-quired by foreigners. For instance, consider the following comment by formerfinance minister Dominique Strauss-Cahn about the French government’s sup-port for the merger of two French oil companies, Elf and Total Fina:

[The merger will create] a French oil group that is almost at the level ofthe three world leaders and therefore really protected from any takeoverattempt by an Anglo Saxon or American [company].2

The anecdotal evidence about nationalist behavior raises several empiricalquestions. Do governments really resist the acquisition of domestic companiesby foreign companies? If so, are such reactions just political statements or dothey have real economic effects on mergers and acquisitions? For instance, doeseconomic nationalism impede capital flows and investment by deterring futureacquisition attempts by foreign firms, or do the government interventions affectthe premiums offered to target shareholders? Furthermore, what are the eco-nomic, political, and sociological factors behind nationalism in mergers? Theseare some of the questions that this paper addresses.

Our study of economic nationalism uses hand-collected data on governmentreactions to individual merger attempts in the 15 European Union (EU) coun-tries (as of 1996) from 1997 to 2006. We show that domestic governments aremore likely to support domestic acquirers and oppose foreign ones even thoughthe EU treaty does not leave them with jurisdiction to rule in merger attemptson the basis of nationality. These results are robust to controlling for target,acquirer, and bid characteristics; macroeconomic conditions; as well as targetindustry, target country, and year fixed effects. We also demonstrate that na-tionalism has not only a direct impact on the outcome of the merger for whichit is targeted, but also, and perhaps more importantly, an indirect deterrenteffect on future foreign bids for other firms in that country. In other words,nationalism affects international investment and capital flows even if they arenot the direct targets of a particular nationalist intervention.

We further show that nationalist interventions are more frequent when pref-erences for natives over foreigners in both the social and the economic domainsare stronger. We measure the importance of such preferences by the vote shareof extreme right parties, for which preferences for natives and against foreign-ers are defining issues in Europe, and by survey evidence. We also find thatnationalist reactions are stronger under weaker governments, in countriesholding the rotational presidency of the EU, and against firms in countries forwhich the people in the target country have little trust or affinity. Interest-ingly, we do not find a significant effect for unemployment, GDP growth, or theideology of the prime minister in the target country.

The study of nationalism in economics has a long history, and we follow anold tradition in using the term “economic nationalism” to refer to the preference

2 Owen (1999).

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for natives over foreigners in economic activities.3 Of this earlier literature, thepaper closest to our own might be Golay (1958), who studies the impact of suchpreferences on the ownership of firms in postcolonial Southeast Asia.4 Much ofthis literature focuses on trade protectionism. Interestingly, EU countries, onwhich we focus, have some of the most liberal policies in the world with respectto the flow of goods and capital, at least among themselves. Furthermore, ourstudy focuses on some of the richest countries in the world, unlike recent workon economic nationalism that focuses on less developed countries.5

While economic nationalism is unlikely to be restricted to Europe only,6 wechose to focus on large merger attempts in the EU because the EU providesan ideal setting for a study of this kind for several reasons. First, for largemergers across national borders in the EU, the European Commission, not thenational governments, is the antitrust authority. Hence, a nationalist policy bydomestic governments cannot be disguised as procompetition policy. In fact, aswe explain later when we discuss the legal background, the member countriesof the EU rarely have de jure power to block any merger based on the acquirer’snationality; instead, they have to rely on their de facto power. Second, Europe-wide economic integration is unlikely to be complete. Indeed there still seem tobe many opportunities for cross-border mergers, especially following the recentfinancial crisis. A study of the impediments to this integration is thereforeimportant. Third, there have been a sufficient number of domestic and cross-border merger attempts within the EU to allow for statistical analysis. Finally,a large body of anecdotal evidence points to economic nationalism in the EU.

The recent crisis has only increased the importance of economic nationalism.Many firms are distressed and likely to exit their industry. Given widespreadweaknesses in a given country, a potential acquirer may be more likely to befound in other countries. Yet calls for political intervention in the economyin general and for protectionism in particular have increased in the popularpress.7 Considering the role of protectionism in deepening and spreading the

3 See, for example, Feiler (1935), Knight (1935), von Hayek (1937), von Mises ([1943] 1990), Seers(1983), Olson (1987), and Helleiner and Pickel (2005). Breton (1964, p. 377) defines nationalism as“the investment of present scarce resources for the alteration of the interethnic and internationaldistribution of ownership.” The different treatment of foreign acquiring firms from domestic onesthat this paper demonstrates is also related to the discrimination literature that starts with Becker(1957).

4 With respect to our use of the vote share of extreme right parties as a proxy for nationalistsentiments, it is also interesting to note that Knight (1935) focuses on “fascist nationalism” in hisstudy of economic theory and nationalism.

5 See, for example, Macesich (1985) and Burnell (1986).6 Dubai Port’s attempt to acquire a Florida port and the attempt by Chinese oil company CNOOC

to acquire U.S. oil company Unocal are some of the better-known examples. Both were withdrawnafter political opposition. It is interesting to note that China retaliated by not allowing Coca Colato acquire one of its bottlers in China (see, for example, Petrusic (2006) The Economist (March 5,2009), and Timmons (2006)).

7 See the discussion in Schuman (2009), and The Economist (February 5, 2009a), among others.


Great Depression around the world (Irwin (1998)), an analysis of economicnationalism and its impact is timely.8

Our paper is related to several recent studies that examine the role of mergerregulations in the European context. Aktas, de Bodt, and Roll (2004), Carletti,Hartmann, and Ongena (2012), and Duso, Neven, and Roller (2007) study thestock market response to regulatory decisions or legislative actions using eventstudy methodology. Our focus and methodology, however, are different. Guiso,Sapienza, and Zingales (2009) and Bottazzi, Da Rin, and Hellmann (2008)demonstrate the importance of trust in cross-border financial investmentsby using macroeconomic and venture capital investment data, respectively.Ahern, Daminelli, and Fracassi (2012) also use macroeconomic data and findthat the volume of cross-border mergers is smaller when countries are moreculturally distant. In contrast, we focus on nationalism and use microlevelmergers and acquisitions data as well as hand-collected data on actual gov-ernment reactions.9 Finally, Morse and Shive (2010) find that country-levelpatriotism is significantly related to the home bias in equity investments, andGupta and Yu (2009) show that bilateral capital flows reflect bilateral politicalrelations. Unlike these studies, our study is at the micro level.

This paper is structured as follows. Section I summarizes the institutionalbackground. Section II describes our data and sample. In Section III, we presentour main findings on economic nationalism in government reactions to mergerattempts. Section IV studies the sociological and political factors behind nation-alism. Section V examines the direct impact of nationalism on merger outcomes.In Section VI, we study the indirect impact of nationalism, namely, whetherit deters future foreign acquisition attempts in that country. Section VIIconcludes.

I. Institutional Background

Mergers above a certain size threshold with a sufficiently large representa-tion across the EU are deemed to have a “European Community Dimension,”in which case the relevant competition authority for these mergers is the EU.Exceptions as discussed below notwithstanding, member countries have to im-plement the ruling made by the European Commission on a merger case. Anyappeal can be made only at the European Court. This section first reviewsthe regulation in the EU, and then discusses how the governments of membercountries implement nationalist policies within this legal framework.

8 Note that we do not study nationalizations in which the government takes an ownership stakein firms.

9 For studies on European mergers and acquisitions but without a political economy focus,see, for example, Rossi and Volpin (2004), Faccio and Masulis (2005), Ferreira, Massa, and Matos(2007), Bris and Cabolis (2008), and Erel, Jang, and Weisbach (2012). See Erel, Liao, and Weisbach(2012) for the determinants of cross-border mergers and acquisitions around the world.


A. Regulation in the EU

For most of our sample period, the EU’s approach to mergers and acquisitionswas determined by the EU Merger Regulation of 1989, as amended in 1997.10

The European Commission, as opposed to the individual countries, had theauthority to rule on mergers if the mergers were deemed to have a communitydimension, which is defined as follows:

� The aggregate worldwide turnover of all the merging parties is more than5 billion euros.11

� The aggregate community-wide turnover of each of at least two mergingparties is more than 250 million euros.12

The main exception to these size and breadth thresholds is that, if more thantwo-thirds of the turnovers of each merging party take place in one and thesame member state, the competition authority is the government of that mem-ber country. The implication of this community dimension rule is that mergersbetween large companies from different countries within the EU typically fallwithin the jurisdiction of the European Commission, while mergers betweenlarge companies from the same country may satisfy the exception to the com-munity dimension rule. This distinction will prove to be important in allowingthe creation of “national champions” as discussed below.13

If a merger satisfies the community dimension, a member state can still take“appropriate measures” to protect the following legitimate interests:14 publicsecurity, plurality of media, prudential rules for financial companies, and otherpublic interests that are recognized by the European Commission. In otherwords, nationalism in defense and media companies is explicitly allowed, somergers involving those companies are excluded from this study. However,beyond these two industries, the EU’s Merger Regulation leaves little de jure

10 See Council Regulation (EEC) No. 4064/89 as amended by Council Regulation (EC) No.1310/97 and hereafter referred to as the EC Merger Regulation. This was replaced by Council Regu-lation (EC) No. 139/2004 but the definition of “community dimension” in Article 1 that determinedthe scope of the European Commission’s jurisdiction did not change. In general, the changesbrought by the latter regulation were minor (see Hinds (2006)).

11 For banks, “turnover” is calculated as the sum of interest income, income from securities,commission income, net profit on financial operations, and other income; for insurance companies,it is the value of gross premiums on policies written; see Article 5 of the EC Merger Regulation.

12 The 1997 amendment accepted a lower threshold of 2.5 billion euros of aggregate turnover if(1) in each of the three-member states, the aggregate turnover of the merging parties is more than100 million euros; and (2) the aggregate community-wide turnover of each merging party is morethan 100 million euros.

13 Although it is beyond the scope of this paper, notice that mergers between two companies withmain operations located outside of Europe may still satisfy the community dimension rule and,hence, require the European Commission’s approval. The case of the proposed merger betweenGeneral Electric and Honeywell, which was approved by U.S. regulators but rejected by Europeanregulators, is a good example of the implications of this rule for non-European companies (seeEvans (2002)).

14 See Article 21 of the EC Merger Regulation.


power to individual countries to implement their economic nationalism. So wenow turn to their de facto power in implementing such policies.

B. Common Methods of Implementing Nationalism in M&As

We define a company’s nationality as its—or its ultimate parent’s—countryof registration, which we discuss in more detail in the Data section. Belowwe review common methods used by individual countries in implementingnationalist policies in mergers in our sample. Multiple methods are typicallyused simultaneously. Appendix B provides several examples of governmentinterventions.

B.1. Prudential Rules for Financial Companies

The EC’s Merger Regulation allows domestic governments to oppose an ac-quisition of a financial company based on prudential rules even if the commu-nity dimension is satisfied. This exception allows governments to implementnationalist policies under the rubric of prudential rules. This ability, how-ever, has been relatively restricted since the Champalimaud case in 1999, inwhich the European Commission took Portugal to the European Court becausethe Portuguese government vetoed the acquisition of a Portuguese bank by aSpanish bank based on the nationality of the acquirer (Gerard (2008)). Theprudential rules exception often serves as a way for the government to gaintime while searching for a “white knight” for the domestic target instead ofvetoing an acquisition outright.

B.2. Public Interest

The EU Merger Regulation also allows domestic governments to oppose amerger in order to protect public interests, which are left undefined in theMerger Regulation. Although this might seem to be a catch-all clause thatcan be invoked at will by individual governments to block a merger, its use isactually limited in practice because any public interest must first be recognizedas such by the European Commission.

B.3. Moral Persuasion

Moral persuasion is especially common when governments try to stop amerger at the rumor stage by stating that they are against it. Although theymay have no de jure power to stop a merger, the implicit threat is that the ac-quiring company will be dealing with a hostile domestic government on manyregulatory issues if the acquisition goes through. This implicit threat is morepowerful if the government is also a major customer, as the case may be for apharmaceutical company.


B.4. Golden Shares in Privatized Companies

In many privatized companies, domestic governments still hold “goldenshares,” or the right to veto major corporate changes, such as the decisionto be acquired. This can be a major deterrent to foreign acquirers even thoughsuch rights are increasingly in a legal gray area because they are frequentlyrejected in the European Court when challenged (Adolff (2002)).

B.5. Playing for Time

Apart from the prudential rules for financial companies as mentioned above,requirements for the stock market regulator to approve any tender offer and/orapprovals necessary from various commissions (such as energy boards) to clearpotential mergers are often used by the domestic government. In this way,governments gain time to find and/or fund a friendly bidder for the target.However, politicians’ control over such regulators varies across countries andtime.

B.6. Providing Financing to Domestic Bidders

Domestic governments often support domestic bidders by providing financingto complete the acquisition. Direct aid from the government budget, however,is rarely used. Instead, public pension funds and government-owned bankslend to the acquirer or invest in the merged company. There are typicallyfewer restrictions on these financial institutions’ investment choices than therestrictions placed on individual governments by the EC Merger Regulation.Given the limited effectiveness and questionable legality of other methods,this method may be observed even more frequently in the future, especially ifgovernments start creating sovereign wealth funds that can be used to preventthe acquisition of domestic companies by foreign companies, as advocated byformer French president Nicolas Sarkozy (Hall (2008)).

B.7. Finding White Knights

This is one of the most effective methods to block an unwanted acquirer. Whileusing other methods to gain time, the government and/or target managementtry to find a friendly acquirer (white knight) or a friendly blocking minorityholder (white squire). Advantageous financing through government-controlledfinancial institutions often follows as discussed above.

B.8. Creating National Champions

This involves supporting the merger of two domestic companies in the hope ofcreating a new company that is too big to be taken over by foreign firms. Targetsize is often a good deterrent of foreign acquisitions and this preemptive moveis very common.


II. Data and Sample Description

Our sample contains the largest 25 merger targets by market capitalizationof target firms in each of the first 15 EU countries (as of 1996) from 1997 to 2006.These countries are Austria, Belgium, Denmark, Finland, France, Germany,Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden,and the United Kingdom. All firms in our sample are publicly listed. We definethe nationality of a company as its country of registration or, if it is majority-owned, as its parent’s country of registration.

We use Thomson Financial’s SDC Mergers and Acquisitions database for non-U.S. targets to identify merger attempts and their characteristics. We includea merger bid in our sample if the acquiring firm aims, with the proposed acqui-sition, to become the majority owner or to cross the 20% ownership thresholdto become the largest shareholder. If there are multiple bidders for the sametarget firm, we keep all of them. For Luxembourg, there are only 10 mergerattempts during this time period. All other countries have 25 observations ormore due to multiple bids, forming a sample size of 415 merger bids for 15countries. Spain has the largest number of observations at 35. These mergerbids are made by firms in the same country as the target firm as well as byforeign firms from all around the world. Our sample comprises 197 domesticbids and 218 foreign bids.

Facing an acquisition bid, the target firm’s government has three choices:support the bid, oppose the bid, or be neutral/do nothing. To identify govern-ment reactions to the merger bids, we search newspaper articles about eachmerger attempt using Factiva. We use a large set of key words to identify ar-ticles likely to be relevant and read all of them.15 Based on these newspaperarticles, especially using quotes from government representatives, we identifya government’s reaction to a merger bid as support, opposition, or neutral/no re-action. We use only quotes by prime ministers and cabinet ministers—and theirspokespersons—as well as actions taken by them. For targets in banking, wealso include central banks, which typically examine any bank merger. No othergovernment agency or politicians, including those that belong to the governingparty, are used to classify the data. Any possible disagreements among cabinetministers do not appear to be made public. If the domestic government has theanticompetition jurisdiction on a domestic merger and the cabinet follows therecommendation of the agency in charge of the anticompetition examination,the government action is not considered an intervention for our purposes. Themanual search for government actions was, by far, the most time-consumingaspect of our study.

There are both advantages and disadvantages to our approach. The maindisadvantage is that we underestimate economic nationalism in mergers and

15 The following are the key words that we use to search the body of articles in order to iden-tify relevant articles: government, minister, politic*, national assembly, parliament, central bank,nationalism, patriotism, protectionism, champion, industrial jewel, national jewel, industrial sym-bol, national symbol, icon, national security, strategic interest, strategic sector, strategic industry,public interest, national interest, municipal, state-owned, and patriotic.


Figure 1. Government support/opposition for domestic and foreign acquisition at-tempts. This figure shows the reaction (support vs. opposition) of the target country’s governmentto merger bids. The sample contains the 25 largest merger bids by market capitalization in each ofthe 15 EU countries as of 1996. These countries are Austria, Belgium, Denmark, Finland, France,Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and theUnited Kingdom. If there are multiple bidders for the same target, all bids are included. There are415 merger attempts in total. The sample period is 1997 to 2006.

acquisitions by looking at the government reaction to actual or rumored bids.For example, if a country’s government is known to oppose foreign acquirers,potential foreign acquirers will fail to materialize in the first place and thegovernment will not need to oppose openly any foreign bids. In this case, wewill not capture a nationalist reaction by that country’s government, and thusour method is likely to underestimate nationalism in cross-sectional analysis.16

The main advantage of our approach is that it focuses on direct governmentreactions rather than surveys of nationalist sentiment or the ideology of theruling party, which may or may not be correlated with actual actions. Thismethod also allows us to exploit the timing of government reactions and studytheir subsequent deterrent effect on future merger attempts.

Simple frequency counts of government reaction provide initial evidence thatwhether the bidder is foreign or domestic is an important factor behind govern-ment reactions. Governments are more likely to support a domestic acquisitionand oppose a foreign acquisition of a domestic company. Figure 1 illustrates this

16 This is less of a problem in time-series analysis, where we study the impact of nationalism onforeign merger bids in the years that immediately followed. If a country has at least one nationalistreaction, time-series analysis can be performed and the overwhelming majority of the countries inour sample have at least one nationalist reaction in our sample period.


Table IGovernment Reaction to Domestic and Foreign Merger Bids

This table reports the reaction of the target country’s government to merger bids. The samplecontains the largest 25 merger targets by market capitalization in each of the 15 EU countries asof 1996. If there are competing bidders for the same target, all bids are included so a country’stotal may exceed 25. These countries are Austria, Belgium, Denmark, Finland, France, Germany,Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the UnitedKingdom. The sample period is 1997 to 2006. Pearson Chi-squared tests the equality of distribu-tions between domestic bids and foreign bids across government reactions.

Government Reaction

Opposition Neutral Support Total

Domestic Bids 9 154 34 197Foreign Bids 28 183 7 218Total 37 337 41 415

Note: Pearson’s Chi-squared p-value < 0.001.

difference visually and Table I provides a more detailed tabulation. AlthoughTable I indicates that governments stay neutral, or do not show any reaction,to the majority of bids, the Pearson chi-squared test provides evidence againstthe equality of distributions for government reactions by the nationality of theacquiring company at a significance level better than 1%.

There are large differences across countries in the degree of interventionism.France, Italy, and Spain, followed by Portugal, have the most interventions onmerger attempts in our sample, where Greece and the United Kingdom haveno interventions in our sample. In Section IV, we study the sociological andpolitical factors behind nationalism.

We obtain firm-level data such as market capitalization and net income fortarget firms from Datastream and Global Compustat. Table II, Panel A, reportssummary statistics on target firms and the merger bids that they receive fromdomestic and foreign acquirers. Based on a comparison of sample statistics,there is no statistically significant difference across targets based on whetherthe acquirer is foreign or domestic.

Table II, Panel B tabulates similar characteristics by the reaction of thetarget country’s government. We see more differences based on governmentreaction. Compared to the median merger bid that gets a neutral or no reactionfrom the government (1.4 billion euros), the median bid that the governmentopposes or supports is larger (6.3 and 6.6 billion euros for opposition and sup-port, respectively). Governments also tend to oppose hostile or unsolicited bidsmuch more frequently. Most importantly for our analysis, 75.7% of all mergerattempts that are resisted by the government are initiated by foreign acquirerswhile only 17.1% of the bids supported by the government are foreign bids.This difference is statistically significant at the 1% level.

For robustness checks in multivariate analysis, we also employ country-levelcontrols. GDP growth and the unemployment rate, which is reported as the per-centage of the labor force, come from the International Monetary Fund (IMF)


Table IISample Statistics for Merger Bids

The statistics describe target firms and merger bids that they receive by whether the acquireris foreign or domestic (Panel A) and by the reaction of the target country’s government (PanelB). Our sample contains the 25 largest targets in each of the first 15 EU countries (as of 1996)between 1997 and 2006. Market Cap. is the market capitalization of target firms in real euros as of4 weeks before the merger bid. Net Income/Market Cap is the ratio of the target firm’s net incomeover market capitalization as of the most recent fiscal year-end before the bid is announced.Hostile/Unsolicited Bid Dummy takes a value of one if the bid is classified as hostile and/orunsolicited, and zero otherwise. The last row in each panel reports the number of observations for allvariables except the number of observations for Net Income/Market Cap, which is in parentheses.p-values from Wilcoxon rank-sum tests for the medians and mean difference tests for the means(between opposition and support samples in Panel B) are reported. The symbols ***, **, and *indicate significance at the 1%, 5%, and 10% levels, respectively.

Panel A: Nationality of the Acquirer

Statistic Domestic Bidder Foreign Bidder p-Value All

Market Cap. (Billions euro) Median 2.91 1.69 0.40 2.49Net Income/Market Cap Median 5.8% 5.9% 0.895 5.8%Hostile/Unsolicited Bid Dummy Mean 16.8% 12.4% 0.21 14.5%

N 197 (196) 218 (217) 415 (413)

Panel B: Government Reaction

Statistic Opposition Support p-Value Neutral All

Market Cap. (Billions euro) Median 6.3 6.6 0.645 1.4 2.5Net Income/Market Cap Median 5.8% 5.6% 0.76 5.8% 5.8%Hostile/Unsolicited Bid Dummy Mean 43.2% 17.1% 0.012** 11.0% 14.5%Foreign Bidder Dummy Mean 75.7% 17.1% 0.00*** 54.3% 52.5%

N 37 41 337 (335) 415 (413)

database. The political affiliation of the ruling party comes from rulers.org, andthe election dates come from electionguide.org and other Internet sources.

III. Multivariate Analysis of Economic Nationalism in M&As

A. Specification

To study the government reactions to merger bids, we employ a discrete-choice model that estimates the likelihood of a particular government reactionto a given merger bid. When the target firm receives a merger bid, the govern-ment has three choices: oppose, support, or do nothing/stay neutral. Given thenumber of choices, a multinomial logit model allows us to estimate the effect ofbid-, firm-, and macro-level factors on the government’s reaction to the mergerbid (see McFadden (2001) and Train (2003) for an overview). A different setof coefficients is estimated for different outcomes within the same regression.These estimates are relative to the base outcome, which is taken to be do-ing nothing or staying neutral, as this outcome is the observed reaction in themajority of cases. We provide average marginal effects with heteroskedasticity-robust standard errors corrected for clustering at the target country level.


Table IIINationalism in Mergers and Acquisitions: Main Regressions

This table reports average marginal effect estimates for a multinomial logit model. The depen-dent variable is the government reaction, which can be opposition, support, or the base outcome,no/neutral reaction. Foreign Acquirer Dummy is equal to one if the bidder is not from the samecountry as the target firm and zero otherwise. Ln (Market Cap) is the natural logarithm of the targetfirm’s market capitalization and Net Income/Market Cap is the ratio of its net income over marketcap as of the most recent fiscal year-end before the bid is announced. Competing Bid Dummy isequal to one if there is a competing bid for the target and zero otherwise. Hostile/Unsolicited BidDummy is equal to one if the bid is classified as hostile and/or unsolicited. Far Right Vote Shareis the share of votes obtained by extreme right parties in the most recent election in the targetcountry before the bid was announced. Heteroskedasticity-robust standard errors, corrected forclustering of observations at the target country level, are in parentheses. The symbols ***, **, and* indicate significance at the 1%, 5%, and 10% levels, respectively.

Government Reaction

(1) (2) (3)

Opposition Support Opposition Support Opposition Support

Foreign Acquirer 0.151*** −0.136*** 0.113*** −0.125***

Dummy (0.039) (0.016) (0.036) (0.019)Far Right Vote Share 0.005** 0.004***

(0.002) (0.001)Foreign Acquirer 0.006* −0.008***

Dummy * Far RightVote Share

(0.003) (0.002)

Ln(Market Cap) 0.019*** 0.032*** 0.016** 0.039*** 0.017*** 0.024***

(0.006) (0.011) (0.006) (0.011) (0.005) (0.008)Net Income/Market 0.136 0.012 0.134 0.008 0.146 0.037

Cap (0.160) (0.271) (0.131) (0.255) (0.123) (0.239)Competing Bid 0.065* 0.073** 0.080** 0.065* 0.040 0.061*

Dummy (0.039) (0.032) (0.036) (0.039) (0.036) (0.033)Hostile/Unsolicited 0.083** −0.005 0.094*** −0.013 0.104*** −0.014

Bid Dummy (0.039) (0.024) (0.026) (0.039) (0.034) (0.029)Year FEs Yes Yes Yes Yes Yes YesTarget Country FEs Yes Yes Yes Yes No NoTarget Industry FEs Yes Yes Yes Yes Yes Yes

413 413 4110.339 0.417 0.295

B. Results

Table III provides estimates of our main multinomial logit model. The es-timates are for two possible outcomes, namely, government opposition andgovernment support, and are relative to the base case of no reaction/stayingneutral. The first model serves as a benchmark and includes characteristics atthe bid and target firm levels but excludes the Foreign Acquirer Dummy, ourmain variable of interest.

The benchmark regression shows a statistically significant size effect: a 10%increase in target size increases the probability of opposition by 0.19 percentage


points and that of support by 0.32 percentage points on average, compared toa 10% unconditional probability for either outcome. This effect is significant atthe 1% level for both outcomes. European governments are also more likely tooppose a bid by 8.3 percentage points on average if it is hostile or unsolicited.

The second regression adds Foreign Acquirer Dummy, our main variableof interest, to the explanatory variables. This variable has a large averagemarginal effect that is significant at the 1% level for both types of intervention.European governments are 15.1 percentage points more likely to oppose and13.6 percentage points less likely to support a foreign acquirer, on average.This is a very strong preference for domestic owners and against foreign ownersgiven that the unconditional probability is about 10% for both outcomes andonly about half of the sample acquirers are foreign companies.

As mentioned in the introduction, we follow an old tradition in economicsand use the term nationalism to denote the preference for natives againstforeigners. A natural question to ask is whether the nationalism we find aboveis stronger when such nationalist sentiment is strong. However, it is not trivialto measure such sentiment or to find a proxy for it. We consult the recentpolitical science literature that studies the rise of extreme right parties inEurope in the 1990s and thereafter. Three main findings of this literature areimportant for our analysis.17

First, a common theme of these European parties is their advocacy andpreferences for natives over foreigners and immigrants. For example, Mudde(1996) finds that, among the 26 different academic studies surveyed, the fol-lowing five features are mentioned by at least half of the studies: nationalism,racism, xenophobia, antidemocracy, and strong state.

Second, despite the free market origins of some of these extreme right parties,by the 1990s most of them adopted economic policies that are protectionistand economic nationalist, and against globalization (see, for example, Betzand Swank (2003), Mudde (2007, pp. 119–137, 184–197), Zaslove (2008), andHainsworth (2008, pp. 85–89)).

Third, although extreme right parties rarely came to power on their own,their impact on European politics has been large as they have forced other par-ties to move to the right and they have dominated the discussion on foreigners(see, for example, Bale (2003), Schain (2006), Hainsworth (2008, pp. 111–121)).

Following the findings of this literature, we use the vote share of extremeright parties as identified by Golder (2003) and updated by Wendt (2009) as aproxy for the strength of nationalist sentiment.18 We test for whether the im-pact of foreign ownership of the acquirer on the government decision increasesas the vote share of extreme right parties also increases. We are not aware ofany other empirical study that uses this proxy but we are certainly not the first

17 See, for example, Hagtvet (1994), van Der Brug, Fennema, and Tillie (2000), Golder (2003),Givens (2005, esp. pp 68–86), Bjørklund (2007), Wendt (2009), and the references cited below.In this voluminous literature, Hainsworth (2008) provides a concise book-length treatment andfurther references.

18 We thank Christopher Wendt for sharing these data.


in economics to link extreme right ideology to economic nationalism (see, forexample, Knight (1935)).

This test is essentially a test for the interaction effect between the ForeignAcquirer Dummy and Far Right Vote Share. In a usual linear estimation, thiswould be straightforward—the coefficient on the interaction term would imme-diately give the interaction effect. However, in a nonlinear estimation such asthe multinomial logit model here, Ai and Norton (2003) show that the calcula-tion of the interaction effect is more complicated, and that it typically dependsalso on coefficients other than that on the interaction term as well as on the val-ues that the independent variables take. In Appendix A, we provide details onhow the average marginal effects are derived and calculated for the interactioneffects in the multinomial logit estimation.

The third regression reported in Table III is the same as the second regressionexcept that Far Right Vote Share and its interaction with Foreign AcquirerDummy are included. Country fixed effects, on the other hand, are omittedas the vote share of extreme right parties changes only in election years. Theresults show that European governments are more likely to intervene, bothin support of or opposition to a merger, where and when the extreme rightparties are strong; this effect is statistically significant at the 5% level. Theaverage marginal effect of foreign acquirer is somewhat smaller than, thoughstill comparable to, the values reported above and significant at the same 1%level.

Our main interest, the interaction effect, is also economically significant. Aone percentage point increase in the extreme right vote share increases theprobability that the domestic government opposes a foreign acquirer by 0.6percentage points, on average; this effect is significant at the 10% level. Toput this effect in perspective, the vote share of extreme right parties is in lowsingle digits where and when they are weak but increases to low double dig-its when they are strong. Hence, a 10 percentage point increase in the voteshare increases the probability of opposition to a foreign acquirer by 6 percent-age points, which is more than half the unconditional probability. Similarly,a 10 percentage point increase in the extreme right vote share decreases theprobability of support for a foreign acquirer by 8 percentage points, which isclose to the unconditional probability. This effect is significant at the 1% level.

To summarize, the nationalist preference of governments for domestic ownersover foreign owners is stronger when the nationalist sentiment of voters is alsostrong. The next subsection provides robustness tests of our main result andthis interaction effect.

C. Robustness

C.1. Macroeconomics

Macroeconomic factors may also affect government decisions. In particular,the effect of the extreme right vote share documented above may simply bea reflection of macroeconomic factors, especially unemployment, rather than


the role of nationalist sentiment in that country.19 In Table IV, Panel A, werepeat the third regression in Table III by substituting the extreme right voteshare first with the GDP growth rate, and then with the unemployment rate.Neither of these terms has a statistically significant effect either alone or in-teracted with the foreign acquirer dummy. Hence, the extreme right vote shareis not capturing any effect of macroeconomic factors, especially of unemploy-ment. Furthermore, the foreign ownership of the acquirer continues to have aneconomically and statistically significant effect.

C.2. Acquirer and Bid Characteristics

We check the robustness of our results to controlling for acquirer size andprofitability, using, respectively, the natural logarithm of the acquirer’s mar-ket capitalization and its net income over market capitalization. These datacome from Datastream as of the most recent fiscal year-end before the bid isannounced. Unfortunately, we only have data on acquirer size for 255 bids, orabout two-thirds of the sample. The results are reported in the first regressionof Table IV, Panel B. Neither acquirer size nor profitability has a statisticallysignificant effect, but the foreign ownership of the acquirer continues to havea statistically and economically significant effect.

We check the robustness of our results to whether the bid consists only of cashor includes the stock of the acquiring company (second regression of Table IV,Panel B). We have data for only 342 bids for this robustness check. We findthat governments are more likely to support a bid that includes the acquiringcompany’s stock. Our main variable of interest, the foreign ownership of theacquirer, remains statistically and economically significant.

C.3. Other Robustness Checks

We also perform additional robustness checks and present them in detailin the Internet Appendix.20 Our mergers and acquisitions data include somemerger rumors but the selection of rumors, unlike formal merger bids, mayincorporate subjective criteria by the data provider, and, in particular, maychange across countries and over time. Hence, we repeat our main regressionafter excluding rumors from the sample. This amounts to excluding 23 datapoints, or about 5% of the full sample from the analysis. We find that theeconomic nationalism found above remains robust to the exclusion of theseacquisition rumors.

In some companies, the domestic government owns golden shares, the rightto veto a major decision, including mergers. We search Factiva to identify the

19 Unlike the antiforeign preferences of these parties, the role of unemployment in the strengthof these parties is mixed in the political science literature. Arzheimer and Carter (2006) finda positive correlation while Bjørklund (2007) finds a negative one. Golder (2003) documents apositive correlation only when the immigrant population in that country is also high.

20 The Internet Appendix may be found in the online version of this article.


Table IVNationalism in Mergers and Acquisitions: Robustness

This table reports average marginal effect estimates for a multinomial logit model. Panel A includetests for robustness to macroeconomic factors. Panel B includes tests for robustness to acquirer andbid characteristics. The dependent variable is the government’s reaction, which can be opposition,support, or the base outcome, no/neutral reaction. Foreign Acquirer Dummy is equal to one ifthe bidder is not from the same country as the target firm and zero otherwise. Macroeconomiccontrols are the target country’s GDP Growth and Unemployment Rate as a percentage of totallabor force (both as of the previous year-end). Other control variables included but not reportedare Ln(Market Cap, Net Income/Market Cap, Competing Bid Dummy, Hostile/Unsolicited BidDummy, Year FEs, and Target Industry FEs (both in Panels A and B) and Target Nation FEs (onlyin Panel B). Heteroskedasticity-robust standard errors, corrected for clustering of observations atthe target country level, are in parentheses. The symbols ***, **, and * indicate significance at the1%, 5%, and 10% levels, respectively.

Panel A: Robustness to Macroeconomic Factors

Government Reaction

(1) (2)

Opposition Support Opposition Support

Foreign Acquirer Dummy 0.109*** −0.126*** 0.117*** −0.127***

(0.040) (0.036) (0.035) (0.039)GDP Growth Rate −0.017 0.009

(0.017) (0.008)Foreign Acquirer * GDP Growth −0.027 0.005

(0.023) (0.024)Unemployment Rate 0.007 −0.000

(0.007) (0.005)Foreign Acquirer * Unemployment −0.004 0.003

(0.012) (0.009)Observations 413 413Pseudo-R2 0.260 0.267

Panel B: Robustness to Some Acquirer and Bid Characteristics

Government Reaction

(1) (2)

Oppose Support Oppose Support

Foreign Acquirer Dummy 0.173*** −0.185*** 0.149*** −0.136***

(0.040) (0.040) (0.040) (0.032)Ln(Acquirer Market Cap) −0.005 −0.009

(0.012) (0.014)Acq. Net Income/Mrkt Cap 0.088 −0.349

(0.171) (0.510)Stock/Hybrid Payment 0.036 0.101***

(0.031) (0.016)Observations 255 342Pseudo-R2 0.468 0.477


target companies in which the domestic government has golden shares andexclude the bids to those target companies, about 5% of our sample, from ouranalysis. Our results are robust to the exclusion of those targets.

IV. Factors behind Economic Nationalism in Mergers andAcquisitions

In this section, we study the factors that strengthen or mitigate nationalistreactions in mergers and acquisitions. We study both sociological and politicalfactors. While the former change only slowly, the latter tend to vary from oneelectoral cycle to the next. We find that both types of factors play a role ingovernment reactions.

A. Sociological Factors

As another measure of the attitude of people in target countries towardforeigners, we use the answers to a question in Eurobarometer survey #47 ad-ministered in the EU in 1997 about the foreigners living in the respondent’scountry. The question asks respondents to choose the statement with whichthey agree. We use the proportion of respondents who agreed with the state-ment “there are too many foreigners [in my country]” as a measure of the targetcountry’s attitude toward foreigners.21 The first regression in Table V, PanelA provides the results. We find that governments are more likely to opposea foreign acquirer in target countries where more people think there are toomany foreigners.

Guiso, Sapienza, and Zingales (2009) and Bottazzi, Da Rin, and Hellmann(2008) find that trust is an important factor behind international investment,so we also check whether government reactions are different if people in thetarget country trust people in the acquirer’s country to a greater extent. Inregression (2) of Table V, we include a measure of the trust that target countrycitizens feel for others, including people in their own country, as well as theinteraction between this variable and Foreign Acquirer Dummy.22 We findthat trust plays a role in government reactions to mergers and acquisitions.Government opposition is weaker if the foreign acquirer is from a country forwhich the people in the target country have a higher level of trust. Similarly,government support for acquirers from those countries is more likely.

21 The use of such a survey question as a measure of attitude is not without problems, however.In addition to the usual concern that people may not behave as they say, the survey we use wasonly administered to young Europeans between 15 and 24 years old. Hence, its results may not berepresentative of the population at large. However, this is the best survey question that we couldfind that covered our sample period.

22 We use the median trust value based on the 1996 survey; see Guiso, Sapienza, and Zingales(2009) for details about the construction of this variable. We thank Luigi Guiso, Paola Sapienza,and Luigi Zingales for sharing their data, which include some non-European acquirers such asJapan and the United States. Note that participants were asked to report trust scores for peoplein their own country as well. Also note that 86.5% of the acquirers in our sample are from Europe(including the domestic acquirers).


Tab

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Following Bottazzi, Da Rin, and Hellmann (2008), we also use the pointsgiven by the target country in the Eurovision song contest as an alternativemeasure of the target country’s affinity for the acquirer’s country. We constructa time series of Eurovision votes covering our sample period for the mergerbids where both the target and the acquirer are from Europe. The variableLn (1 + Lagged Eurovision Votes) is the natural logarithm of the votes thatthe acquiring firm’s country received from the target country in the Eurovisionsong contest in the previous year.23 We report these results in Table V, PanelA. We find that government opposition is weaker if people in the target countryhave greater affinity for the acquirer’s country. We also check whether sharinga common border, language, or religion play a role. In Table V, Panel B, we donot find any evidence that these factors affect government reactions to mergersand acquisitions.

B. Political Factors

We study the role of both domestic and EU politics. The results are reportedin Table VI. We start with the ideology of the prime minister’s party in thetarget country on the announcement date. We use the ideological classificationby Volkens et al. (2010) using party programs. The variable Right Leaningness(the “rile” measure in their data set) is a continuous measure where higherlevels indicate more rightist positions. Leftist parties tend to have negativelevels of this measure. An overwhelming majority of ruling parties has a center-right or center-left ideology. We interact Right Leaningness with the ForeignAcquirer Dummy. The interaction terms do not have significant coefficients.24

Interest groups may be able to influence weak governments more easily, sowe also study whether weak governments are more likely to have nationalistreactions. Coalition governments tend to include smaller parties and may bemore easily captured by interest group politics. We interact the Foreign Ac-quirer Dummy with the binary variable Coalition Government, which takesthe value of one if the target country is ruled by a coalition government onthe announcement date. We find that the coefficient on the interaction termhas the same sign as the Foreign Acquirer Dummy and is statistically signifi-cant for government support. This result indicates that coalition governments,which tend to be weaker than single-party governments, are more likely to takenationalist actions.

We further check this result by interacting the Foreign Acquirer Dummywith Government Vote Share, which is the total vote share obtained by partiesforming the government in the most recent election before the announcement

23 The data source is http://www.eurovisioncovers.co.uk/. A given country can cast 1–8, 10, or12 votes. One complicating econometric issue in using the points given in the Eurovision contestis that countries cannot vote for themselves. We assumed they all give themselves the maximumpoints to keep the domestic mergers in the sample and included Ln(Lagged Eurovision Votes) onlyas an interaction term.

24 We repeated the analysis with a binary variable for a leftist Prime Minister. We did not findstatistically significant effect.

http://www.eurovisioncovers.co.uk/


Tab

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date in the target country. We find that the coefficient on the interaction termhas the opposite sign as the Foreign Acquirer Dummy and is statistically sig-nificant for government support. This confirms that strong governments areless likely to act nationalistically. This result is similar to that in Dinc andGupta (2011), who find that governments are more likely to undertake priva-tizations where they are stronger. These results also indicate that nationalistinterventions are unlikely to be taken by governments following an industrialpolicy with a long horizon.

We also study the role of EU politics. Every EU country assumes the EUpresidency for 6 months on a rotating schedule. Target countries may act lessnationalist during their presidency as they lead the EU, or the power of pres-idency may induce them to become bolder during that time. To test whicheffect dominates, we interact the Foreign Acquirer Dummy with EU RotationalPresidency, which takes the value of one if the target country has the rota-tional presidency on the announcement date. We find that the coefficient onthe interaction term has the same sign as the Foreign Acquirer Dummy andis statistically significant for government opposition. This suggests that targetcountries act more nationalist when they hold the rotational EU presidency.

We also study whether the nationality of the European Commission presi-dent matters. The European Commission is the executive branch of the EU andits president is regarded as the most powerful EU official. The president of theEuropean Commission is nominated by the European Council, which containsthe head of government of every EU member, and is approved by the EuropeanParliament for 5-year terms. As with the EU presidency, target countries mayact more or less nationalistically if the European Commission president is fromtheir country. To test for this effect, we interact the Foreign Acquirer Dummywith EU Commission Presidency, which takes the value of one if the EuropeanCommission president is from the target country on the announcement date.We find that the coefficient on the interaction term has the opposite sign as theForeign Acquirer Dummy and the coefficient on the government opposition isstatistically significant. This suggests that target countries become more reluc-tant to act nationalistically when one of their nationals holds the presidencyof the European Commission. In an earlier version, we also studied the role ofelections following Brown and Dinc (2005) and Dinc (2005) but did not find anystatistically significant effect.

V. Direct Impact of Nationalism

The next important question to address is whether nationalism has anyeconomic impact. After all, government opposition or support may simply be amanifestation of political posturing with little real economic influence. In thissection, we study the direct impact of government intervention. More precisely,we examine whether a merger bid is more (less) likely to succeed when thegovernment supports (opposes) it. We then analyze the effect of governmentopposition on the premiums offered or received, taking the endogeneity of themerger premium into account.


Table VIIImpact of Nationalism on Merger Outcomes: Univariate Analysis

This table reports the reaction (opposition, neutral/no reaction, and support) of the target country’sgovernment and the success/failure of the merger bids. The sample contains the 25 largest mergertargets by market capitalization in each of the 15 EU countries as of 1996. If there are multiplebidders for the same target, all bids are included so a country’s total may exceed 25. The sampleperiod is 1997 to 2006. Pearson Chi-squared tests the equality of distributions between failed bidsand successful bids across the government reactions.

Government Reaction

Opposition Neutral Support Total

Failed Bids 26 120 11 157Successful Bids 11 217 30 258Total 37 337 41 415

Pearson’s Chi-squared p-value < 0.001.

A. Direct Impact of Nationalism on Merger Outcome

We first perform a univariate comparison of the success/failure of the mergerattempts that receive different government reactions. Table VII shows that,of 37 merger bids that the government resists, 26 (70%) eventually fail. Of 41merger bids that the government supports, only 11 (27%) fail. The difference ofdistributions is significant at the 1% level as indicated by Pearson’s chi-squaredtest. This univariate analysis suggests that government interventions have adirect economic impact. Of course, government interventions may simply be aproxy for foreign acquirers. If cross-border merger attempts, once announced,are inherently more difficult to complete, then these univariate statistics mayjust reflect that difficulty. We therefore turn to the regression analysis next.

We employ a binary choice framework—a logistic regression—where the de-pendent variable is equal to one if the merger takes place and zero if the mergerfails. Table VIII reports the results. The first model is the base model withthe Foreign Acquirer Dummy as well as controls at the bid and firm levels.The model also includes the target industry and target country fixed effects.The regression analysis indicates that acquisition attempts that target largercompanies, that attract multiple bids, and that are hostile are less likely to besuccessful. The coefficient on the Foreign Acquirer Dummy is negative but notstatistically significant. This suggests that bidders seem to internalize possibledifficulties in completing a cross-border merger when they attempt the merger.

The second regression adds Government Opposition and Government Sup-port, two dummy variables that identify government reactions. (Recall thatthe government does not react, or stays neutral, in the majority of mergerattempts, so both of these dummy variables are zero for the majority of obser-vations.) The coefficient on Government Opposition is negative and significantat the 10% level whereas the coefficient on the Government Support is positiveand significant at the 5% level. Notice that the Foreign Acquirer dummy is


Table VIIIImpact of Nationalism on Merger Outcomes

This table reports coefficient estimates for a logit model. The dependent variable is equal to oneif the merger bid is successfully completed, that is the merger takes place, and zero otherwise.Government Opposition takes a value of one if the target country’s government opposes the merger.Government Support Dummy is equal to one if the government of the target firm supports themerger. Foreign Acquirer Dummy is equal to one if the bidder is not from the same country asthe target, and zero otherwise. Firm-level controls are the natural logarithm of the target firm’smarket capitalization and the ratio of its net income over market cap as of the most recent fiscalyear-end before the bid is announced. Competing Bid Dummy is equal to one if there is a competingbid for the target, and zero otherwise. Hostile/Unsolicited Bid Dummy is equal to one if the bidis classified as hostile and/or unsolicited. European Commission Intervention equals one if theEuropean Commission intervenes in the merger, and zero otherwise. Ln (Acquirer Market Cap) isthe natural logarithm of the acquirer’s market capitalization as of the most recent fiscal year-endbefore the bid is announced. Regressions include target industry, target country, and year fixedeffects. Heteroskedasticity-robust standard errors, corrected for clustering of observations at thetarget country level, are in parentheses. The symbols ***, **, and * indicate significance at the 1%,5%, and 10% levels, respectively.

Successful Bid

(1) (2) (3) (4)

Government Opposition −1.103* −1.570*** −1.758*

(0.605) (0.587) (0.938)Government Support 0.874** 0.693* 1.158**

(0.443) (0.415) (0.496)Foreign Acquirer Dummy −0.293 −0.029 −0.088 0.353

(0.256) (0.283) (0.291) (0.459)Ln(Market Cap) −0.235** −0.245** −0.261** −0.050

(0.117) (0.120) (0.120) (0.093)Net Income/Market Cap. 1.321 1.592 1.532 1.266

(1.033) (1.142) (1.097) (0.869)Competing Bid Dummy −0.766*** −0.774** −0.774** −1.744***

(0.269) (0.309) (0.350) (0.549)Hostile/Unsolicited Bid Dummy −0.612* −0.444 −0.416 −0.400

(0.326) (0.375) (0.384) (0.784)European Commission Intervention 1.472**

(0.616)Ln(Acquirer Market Cap) −0.241

(0.173)Year FEs Yes Yes Yes YesTarget Country FEs Yes Yes Yes YesTarget Industry FEs Yes Yes Yes YesObservations 413 413 413 248Pseudo-R2 0.098 0.122 0.144 0.213

also included in this regression so government intervention cannot simply bea proxy for possible inherent difficulties in completing a cross-border merger.

If the European Commission believes the target government’s reaction im-pedes the free flow of capital, it may intervene in the merger case. The typicalintervention is typically worded as a “reminder” of EU rules, but it carries theimplicit threat of taking the target government to the European Court as it


did in the Champalimaud case mentioned earlier. We have 18 such cases. Wecontrol for these cases using the European Commission Intervention Dummy inthe third regression. This variable takes a positive and statistically significantcoefficient, which indicates that merger bids are more likely to be successfulafter the European Commission intervenes. The effects of our main variablesof interest, Government Opposition and Government Support, remain robustafter controlling for such interventions.

In the final regression model, we control for the size of the acquirer, usingthe natural logarithm of its market capitalization as of the most recent fiscalyear-end before the bid is announced. Acquirer size does not have a statisti-cally significant coefficient, but both Government Opposition and GovernmentSupport continue to have a statistically and economically significant effect.

The above results show that, relative to government neutrality, governmentintervention has a direct impact on the outcome of corporate acquisition at-tempts. In other words, a merger bid is more likely to succeed if the governmentsupports it while it is more likely to fail if the government resists it. Therefore,the economic nationalism demonstrated above is not just political posturing,but rather it has a direct impact on the workings of the market economy. InSection VI, we also demonstrate its indirect impact on the acquisition of other,uninvolved, companies.

B. Direct Impact of Nationalism on Premium Offered

Next we examine whether government opposition or support affects mergerpremiums offered. A simple comparison of premium statistics by governmentreaction or merger success is tabulated in Table IX. The variable PremiumOffered is calculated as the last price offered by the bidder minus the target’sstock price as of 4 weeks prior to the announcement date, normalized by thelatter and expressed in percentage. We winsorize Premium Offered at the 5%and 95% levels to eliminate the effect of outliers in the sample. For successfulbids, the last price offered is the transaction price; for unsuccessful bids, it isthe last price offered before the bid was withdrawn.

Both the mean and the median premium offered are higher for the opposedbids than for the supported ones (43.60 vs. 33.02 and 30.71 vs. 24.26, respec-tively). However, the differences are not statistically different from zero. Boththe mean and the median premium offered are larger for the failed bids thanfor the successful ones, but the differences are again statistically insignificant.

Next, we analyze the effect of government reactions on bid premiums. How-ever, this task requires care. A government may decide its interventions basedon initial bids, in which case the government intervention variables and theoffered premiums are endogenous. We need an instrument that affects gov-ernment interventions but not (directly) the premium offered. In the previ-ous section, we show that political factors, such as government vote share,European Commission presidency, or whether the government is a coalition,can help to determine government interventions. We believe that such politicalfactors can be valid instruments. It is difficult to see why an acquirer’s premium


Table IXImpact of Nationalism on Premium Offered: Univariate Analysis

This table reports statistics on the premium offered by the reaction (opposition, support, andneutral/no reaction) of the target country’s government (Panel A) and the success/failure of themerger bids (Panel B). Premium Offered is calculated as the final price offered minus the target’sstock price as of 4 weeks before the announcement, normalized by the latter. It is winsorized atthe 5% and 95% levels. p-values from mean difference tests for the means (between oppositionand support samples in Panel A) and Wilcoxon rank-sum tests for the medians are reported. Thesymbols ***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively.

Panel A: Government Reaction

Premium Offered (%)

Observations Mean Median Std Dev.

Opposition 28 43.60 30.71 36.67Support 34 33.02 24.26 29.97Neutral/No Reaction 244 28.70 20.02 32.10p-Value from Mean Difference Test

(Opposition vs. Support)0.23

p-Value from Wilcoxon Rank-Sum Test(Opposition vs. Support)

0.18

Panel B: Merger Outcome

Premium Offered (%)

Observations Mean Median Std Dev.

Failed Bids 82 31.70 25.69 31.80Successful Bids 224 30.12 21.15 32.81p-Value from Mean Difference Test 0.70p-Value from Wilcoxon Rank-Sum Test 0.41

would reflect the government vote share, for example, other than through thegovernment’s intervention decision.25

We focus on the political variables that have a direct effect on the govern-ment intervention decision in Table VI. Unlike in Table VI, we do not focus onthe interaction of these variables with the foreign acquirer indicator becausethe foreign acquirer indicator is likely to violate the exclusivity requirement ofthese instruments. From Table VI, we know that Coalition Dummy significantlyexplains government opposition, while Government Vote Share, EC PresidencyDummy, and again Coalition Dummy significantly explain government sup-port. Therefore, we use Coalition dummy as an instrument for governmentopposition while we use Government Vote Share and EC Presidency Dummy asinstruments for government support for the merger bids.

25 Given that shareholders may be affected by the same sociological factors, like affinity or trust,that affect the government’s decision, such factors may not satisfy the exclusivity requirement ofa valid instrument, unlike political factors.


We are unaware of instrumental variables estimation methods that allow amultinomial choice model in the first stage without making any distributionalassumptions in the second stage. Hence, we choose to model the first-stagegovernment intervention with two equations, one whose dependent variable isthe government opposition indicator, and the other whose dependent variableis the government support indicator. Notice that the government oppositionand support variables that are instrumented are binary variables. One can ap-proach this estimation by using two-stage least squares (2SLS) directly, whichwould ignore the binary nature of the instrumented variables, or by solving atwo-stage maximum likelihood function, which would critically hinge on thevalidity of functional form assumptions. Instead, we follow Wooldridge (2007,p. 4), who suggests performing this instrumental variables estimation by esti-mating the first-stage using probit obtaining predicted probabilities from thisregression, and using these predicted probabilities as instruments in the 2SLSestimation. We therefore start by estimating two probit regressions where thedependent variables are the government opposition indicator and the govern-ment support indicator.

Results are reported in Table X. The first two columns in each panel report es-timates from the first-stage probit models. The F-statistic for the significanceof our instruments is greater than 10 in each case, which suggests that ourinstruments are not weak. The third column in each panel reports the second-stage regression results. In the first panel, the dependent variable is PremiumOffered while in the second panel it is Premium Received, which equals Pre-mium Offered multiplied by the Successful-Bid Dummy. Notice that the sampleis larger in the second panel because many failed bids with missing premiumdata can be set to zero in the second panel. We winsorize our premium measuresat the lower and upper 5% levels to eliminate the effect of outliers. As shownin Table X, neither government opposition nor support, both instrumented, isstatistically different from zero in explaining the premium offered or premiumreceived in mergers.26,27

VI. Indirect Impact of Nationalism: Deterrence of Future ForeignAcquisition Attempts

We have shown that nationalism has a direct impact on the outcome of anacquisition attempt if the domestic government opposes or supports that at-tempt. We now study the indirect effect of nationalism on future acquisitionattempts by foreign companies. More specifically, we study whether national-ism deters foreign acquisition attempts for other companies in that country aspotential bidders may infer from a nationalist intervention the domestic gov-ernment’s willingness to intervene and oppose the European Commission. Any

26 We ran our main regression in Table III using only the sample of merger bids with nonmissingpremium data. The results remain robust.

27 We repeated the regressions in Table X using only EC presidency as an instrument for thegovernment support decision. The results are very similar and are presented in the InternetAppendix.


Table XImpact of Nationalism on Premiums Offered

This table reports results of instrumental variables estimation. The first two regressions of eachpanel report estimates from a first-stage probit model, where the dependent variable is the gov-ernment reaction: Opposition or Support (the target country government’s lack of reaction orneutrality is the omitted category in the second stage). Predicted values from these regressionsare used as instruments for government opposition and support to explain the merger premiumoffered to the targets. Premium Offered, the dependent variable in the second stage reported inPanel A, is calculated as the final price offered minus the target’s stock price as of 4 weeks beforethe announcement, normalized by the latter. In Panel B’s last column, this variable is multipliedby the successful bid dummy, creating the dependent variable Premium Received. Both dependentvariables are winsorized at the 5% and 95% levels. The F-statistic tests the joint significance of theinstruments. Heteroskedasticity-robust standard errors, corrected for clustering of observationsat the target country level, are in parentheses. The symbols ***, **, and * indicate significance atthe 1%, 5%, and 10% levels, respectively.

Panel A: Premium Offered Panel B: Premium Received

First-Stage Probit Second First-Stage Probit SecondStage Stage

(1) (2) (1) (2)Opposition Support Premium Opposition Support Premium

Coalition Dummy −3.328*** −3.752***

(0.870) (1.083)Govt. Vote Share −0.068* −0.056*

(0.038) (0.033)EC Presidency Dummy −1.235*** −0.851***

(0.336) (0.234)Opposition (Instrumented) 19.249 −12.769

(18.368) (18.653)Support (Instrumented) 6.240 5.875

(17.838) (17.298)Foreign Acquirer Dummy 1.190** −1.334*** 1.822 1.364*** −1.304*** −1.246

(0.541) (0.397) (5.994) (0.463) (0.245) (4.995)Ln(MarketCap) 0.099 0.343*** −1.072 0.127 0.223** −2.159

(0.094) (0.114) (1.963) (0.084) (0.088) (1.518)Net Income/Market Cap 1.314 1.083 22.793 0.974 −0.226 11.791

(1.857) (2.393) (23.610) (1.472) (1.726) (8.630)Competing Bid Dummy 1.139*** 0.485* 12.605* 0.992*** 0.540* 6.038

(0.383) (0.250) (6.979) (0.334) (0.283) (4.969)Hostile/Unsolic. Bid Dummy 1.209*** −0.233 7.481 0.981*** −0.089 4.719

(0.462) (0.274) (4.478) (0.304) (0.228) (6.066)Target Nation FEs Yes Yes Yes Yes Yes YesTarget Industry FEs Yes Yes Yes Yes Yes YesYear FEs Yes Yes Yes Yes Yes YesObservations 306 306 306 380 380 380Pseudo-R2/R2 0.457 0.429 0.211 0.408 0.382 0.104F-statistics 14.65*** 15.92*** 12.01*** 15.10***


such deterrent effect of nationalism would add to its direct effect in impedingthe workings of the market economy in general and international capital flowsin particular.

We identify the top 50 listed companies in each country as of the end of 1996and follow them through December 31, 2006 or until they became the targetof an acquisition bid.28 We examine whether these firms become less likely toreceive a foreign bid after a nationalist reaction by their government.29 Ourmain analysis in previous sections requires foreign bids to be made and hencecannot capture the effect of nationalism on bids that are never made due tothe nationalism threat. This problem is less severe here because the analysisin this section requires only one nationalist reaction in a given country andthe overwhelming majority of countries in our sample have at least one suchreaction.

Before we provide a hazard analysis of foreign acquisition attempts in thissample, we start by studying the rate of foreign bids per 1,000 firm-years, theincidence rate, before and after the most recent nationalist intervention in thatcountry. Following the results presented earlier, we refer to both opposition toforeign acquirers and support for domestic acquirers by the domestic govern-ment as nationalist intervention. Figure 2 depicts the incidence rate semiannu-ally for 3 years after the most recent nationalist intervention in countries withat least one nationalist intervention in our sample. It also shows the incidencerate for the base period, which is defined as the time before nationalist inter-vention or more than 3 years after the most recent nationalist intervention.

The incidence rate drops during the first 6 months after a nationalist inter-vention, continues to decrease until it reaches its low point between 13 and18 months, and then slowly recovers. The fact that the drop is not sudden mayreflect the fact that many friendly merger negotiations take place before theybecome public and the companies involved in such talks at the time of nation-alist intervention may choose to continue with their merger. This pattern isconfirmed in a hazard analysis below.

We employ a Cox proportional hazard framework to study the rate of for-eign acquisition attempts before and after nationalist intervention. All theregressions control for target firm size and macroeconomic factors in the tar-get country as well as target industry and target country fixed effects. All thestandard errors are robust to heteroskedasticity and clustering at the targetcountry level.

It is also important to control for merger waves. Cox estimation nonparamet-rically controls for time-specific common factors, which is akin to the effect ofincluding time fixed effects in other settings. In this way, we control not only formerger waves but also for other Europe-wide time-specific common economicand regulatory factors.

28 There are fewer than 50 companies from Luxembourg.29 We do not follow a firm after it receives an acquisition bid because the government intervention

(or the lack thereof) may carry information about the likelihood of government intervention in thefuture and consequently may bias the observation of future bids for that particular company.


Figure 2. The number of foreign acquisition attempts per 1,000 firm-years: Before andafter nationalism in target country. This figure compares the rate of receiving an acquisitionbid from a foreign firm (incidence rate) before and after the most recent nationalist reactionto another target’s merger in that country. Nationalist reaction is defined as the support of adomestic bid or opposition to a foreign bid by the domestic government. The sample includes allthe 50 largest companies by market capitalization in EU countries at the end of 1996 and followsthem between 1997 and 2006. Once a company receives a bid; it is dropped from further analysis.Countries with no nationalist reaction during that time are excluded. The time is in half-years andthe number of foreign bids received is per 1,000 firm years.

In studying the deterrence effect of nationalism, one needs to choose theevents on which to focus. One can focus on the effect of the most recent nation-alist intervention or on all such interventions within a time window. The formerhas the advantage of focusing on the event that is likely to have the strongestdeterrence effect. The disadvantage of this choice is that it may be difficult tocapture long-term effects of nationalism if a country intervenes frequently. Thelatter choice of focusing on all the nationalist interventions within a time win-dow mitigates this disadvantage but has its own disadvantage of studying theeffects of interventions that have already been overshadowed by more recentinterventions. In this paper we use both approaches, starting with the former,and obtain similar results.

We first construct six indicator variables, starting with 1st Half-Year andending with 6th Half-Year. The variable named 1st Half-Year takes the valueof one during the first 6 months after the most recent nationalist intervention.Similarly, 2nd Half-Year takes the value of one during the second 6 monthsafter the most recent nationalist intervention, and so on. These variables arecountry-specific so when they take the value of one, they do so for all the firmsin the country where the nationalist intervention has taken place. Notice that,when these variables are constructed based only on the most recent nationalistintervention only, at most only one of these indicator variables can be equal


to one at a given time. That is, if the government intervened both 6 and 12months before, only 1st Half-Year is one.

Table XI reports the regression results. The first regression, which serves asa benchmark, does not include any nationalism-related variable and includesonly those countries with at least one nationalist intervention in our sample.The second regression, which adds to the benchmark model the six semiannualdummy variables described earlier, confirms Figure 2. All six dummy variableshave negative coefficients and all the coefficients, except those on 1st Half-Yearand 6th Half-Year, are statistically significant. The results are economicallyvery significant. For example, at the low point of the third half-year after anationalist intervention, the rate of foreign acquisition attempts toward thefirms in that country drops to less than 5% (= exp(−3.129)) of the base rate!

The third regression repeats the second regression for the full sample, with-out excluding the countries that have no nationalist reaction in our sampleperiod. The results are both economically and statistically similar.

Our semiannual past nationalism indicators in the regressions above areconstructed based on the most recent nationalism intervention only. As a ro-bustness check, we reconstruct these variables using all the nationalist inter-ventions in that country in the previous 3 years and repeat the regressions.Notice that, when these variables are constructed based on all the nationalistinterventions in the previous 3 years, more than one indicator may be equal toone at a given time. The results reported in the last two columns of Table XIindicate that our previous results are robust to this alternative construction.

Notice that our regressions include country fixed effects. Hence, if a countryintervenes very frequently, much of the deterrence effect of those interactionsare captured by the country fixed effects so our estimates for the postinterven-tion indicators will likely be underestimated. Also recall that we stop followinga firm after it receives its first acquisition attempt, regardless of subsequentgovernment reaction to that acquisition attempt. So these postintervention in-dicator variables capture only the impact of nationalist reactions on the rate atwhich other companies in that country receive a foreign acquisition attempt. Inlight of the results presented earlier, the impact of nationalism on the targetcompanies that are subject to nationalist intervention would probably be evengreater.

We also repeat the hazard analysis above at the country level. Starting againwith the same cohort of the largest 50 listed companies as of 1996, we collapsethe data at the country level and focus on the hazard rate of one of thosecompanies receiving a foreign acquisition bid. We follow each country untilthe end of 2006, so the analysis is not based on only the first foreign bid inthis period but rather on all the foreign bids received by this cohort of firms.The country-level results, reported in Table XII, confirm our firm-level resultsreported above.

These findings show that nationalism has not only a direct impact on theacquisition attempt to which it is directed, but also an indirect impact bydeterring foreign companies from acquiring other companies in that country.


Table XIDeterrent Effect of Nationalism on Future Foreign Merger Attempts

This table presents results from estimating a firm-level Cox proportional hazard regression for acompany to receive its first foreign acquisition bid. The sample is the top 50 listed companies in eachcountry (except Luxembourg) as of the end of 1996. The variable 1st Half-Year is a dummy variablethat takes the value of one in the first 6 months after a nationalist reaction in the target country,where nationalist reaction is defined as opposition to foreign bidders or support for domesticbidders; the other half-year dummy variables are defined accordingly. For regressions under “MostRecent Nationalist Intervention Only,” these variables are constructed based on the most recentnationalist reaction in that country, that is, at most one of these variables can be one at a giventime. For regressions under “All Nationalist Interventions in the Previous 3 Years,” these variablesare constructed based on all the nationalist reactions in the previous 3 years in that country, that is,more than one of these variables can be one at a given time. Firm-level and macroeconomic controlsare as of the most recent fiscal year-end and as of the previous year-end, respectively. Regressionsinclude target industry and target country fixed effects. Heteroskedasticity-robust standard errors,clustered at the target country level, are in parentheses. *, **, *** denote statistical significanceat the 10%, 5%, and 1% levels, respectively.

Most Recent All NationalistNationalist Interventions in the

Intervention Only Previous 3 Years

Ln (Market cap) 0.170* 0.163 0.132 0.167 0.135(0.101) (0.103) (0.096) (0.103) (0.095)

Net Income/Market Cap. −0.058 −0.060 0.008 −0.059 0.006(0.055) (0.059) (0.045) (0.057) (0.044)

GDP Growth Rate −0.161 −0.091 −0.089 −0.102 −0.100(0.128) (0.118) (0.132) (0.122) (0.134)

Unemployment Rate 0.001 −0.007 −0.030 −0.016 −0.048(0.069) (0.070) (0.076) (0.069) (0.080)

After Nationalism1st Half-Year −0.544 −0.677 −0.092 −0.194

(0.595) (0.661) (0.603) (0.652)2nd Half-Year −1.256** −1.351** −0.472 −0.602

(0.509) (0.536) (0.512) (0.526)3rd Half-Year −2.711*** −2.678*** −1.491*** −1.460**

(1.014) (0.996) (0.560) (0.576)4th Half-Year −2.008* −2.058* −1.343* −1.404*

(1.066) (1.076) (0.792) (0.764)5th Half-Year −1.147* −1.227* −0.861* −0.904*

(0.695) (0.680) (0.511) (0.507)6th Half-Year −0.528 −0.495 −0.149 −0.103

(0.762) (0.752) (0.553) (0.564)Industry FEs Yes Yes Yes Yes YesTarget country FEs Yes Yes Yes Yes Yes

Countries Countries Countrieswith with with

Nationalism Nationalism All Nationalism AllSample Only Only Countries Only Countries

Number of Firms 624 624 721 624 721Firm-Years at Risk 5,232 5,232 6,098 5,232 6,098


Table XIIDeterrent Effect of Nationalism on Future Foreign Merger Attempts:

Country-Level AnalysisThis table presents results from estimating a country-level Cox proportional hazard regression forone of the top 50 listed companies in that country as of the end of 1996 (except Luxembourg) toreceive a foreign acquisition bid. The variable 1st Half-Year is a dummy variable that takes thevalue of one in the first 6 months after a nationalist reaction in the target country, where nationalistreaction is defined as opposition to foreign bidders or support for domestic bidders; the other half-year dummy variables are defined accordingly. For regressions under “Most Recent NationalistIntervention Only,” these variables are constructed based on the most recent nationalist reactionin that country, that is, at most one of these variables can be one at a given time. For regressionsunder “All Nationalist Interventions in the Previous 3 Years,” these variables are constructedbased on all the nationalist reactions in the previous 3 years in that country, that is, more thanone of these variables can be one at a given time. Macroeconomic control variables are as ofthe previous year-end. Heteroskedasticity-robust standard errors, clustered at the country-level,are in parentheses. *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels,respectively.

Most Recent Nationalist All Nationalist InterventionsIntervention Only in the Previous 3 Years

GDP Growth Rate −0.000 −0.026(0.058) (0.052)

Unemployment Rate −0.041 −0.033(0.048) (0.041)

After Nationalism1st Half-Year −0.165 0.433

(0.395) (0.376)2nd Half-Year −1.119** −0.709

(0.523) (0.484)3rd Half-Year −1.929** −1.217***

(0.961) (0.433)4th Half-Year −1.909** −1.612**

(0.962) (0.743)5th Half-Year −0.640 −0.704**

(0.423) (0.347)6th Half-Year 0.152 -0.082

(0.620) (0.404)Number of Countries 15 15Country-Years at Risk 150 150

VII. Conclusion

This paper provides evidence of economic nationalism in mergers and ac-quisitions. We find that, instead of staying neutral, governments of countrieswhere the target firms are located tend to oppose foreign merger attemptswhile supporting domestic ones that create so-called national champions, orcompanies that are deemed to be too big to be acquired. We find that these gov-ernment reactions have both direct and indirect economic effects. Governmentopposition decreases the completion chances of acquisition attempts while gov-ernment support increases them. Furthermore, nationalist reactions have an


indirect impact on corporate mergers by deterring future foreign acquirers.These findings indicate that nationalist reactions by governments affect theworkings of the market economy significantly.

We also study the sociological and political factors behind nationalism. Wefind that stronger nationalist sentiment, as proxied by the vote share of extremeright-wing parties or answers to survey questions on foreigners living in targetcountries, lead to more nationalist reactions by governments in mergers. Theaffinity the people in the target country feel toward the acquirer’s country alsoplays a role. Target country governments are less likely to show nationalistreactions for acquirers from countries that enjoy a higher level of trust intarget countries.

Both domestic and European politics also matter. Coalition governments orgovernments with a small vote share are more likely to show nationalist re-actions. This might be due to the fact that weak governments are more likelyto be influenced by special interest groups. Countries holding the rotational6-month EU presidency also seem to use their position for more nationalist re-actions during their presidency. The factors that do not seem to play a role arealso of interest. For example, we find no role for the ideology of the ruling partyin target countries, which tend to have center-right or center-left prime min-isters. This finding suggests that, among others, the nationalist reactions wedocument are unlikely to be motivated by industrial or other economic policieswithin mainstream European politics. Similarly, unemployment rate and GDPgrowth rate do not seem to play a role, which further suggests that nationalismin mergers is more likely to be motivated by sociological and political reasonsthan economic ones.

It is worth mentioning that the merger attempts that form our sample actu-ally took place. In other words, bidders in our sample must already have hadsufficiently high expectations of completing the deals before they attemptedan acquisition in the first place. This leads to an underrepresentation of na-tionalism cases in our sample. For example, if the domestic government is sonationalist that potential foreign acquirers do not even attempt a bid, no mergerbids will be observed. Similarly, a domestic government may be successful indeterring a potential acquirer while the bid is still at the rumor stage; suchrumored attempts may not be part of our sample, a few exceptions notwith-standing. Hence, our analysis is biased against finding nationalism, and thecases of nationalism that we document are an underestimate of all such cases.

To the extent that the markets are competitive and complete, governmentinterventions are likely to have negative implications for economic efficiency.30

With uncompetitive or incomplete markets, government interventions mayhave ambiguous effects. In particular, the government intervention createsa takeover barrier and it might be argued that this may have the beneficialeffect of increasing the takeover premium to domestic shareholders. Usually,

30 Perez-Gonzales (2005), Desai, Foley, and Forbes (2008), and Chari, Chen, and Dominguez(2009) provide empirical evidence on the benefits of unimpeded foreign ownership in non-Europeancontexts.


it is very difficult to analyze the effects of such takeover barriers because thesame barriers also prevent some takeover bids from being successful. Econo-metrically, one needs an instrument that explains the existence of the takeoverbarrier but not directly the premium offered by the acquirer. It is often difficultto find such instruments in many corporate finance settings, but our analysisof political factors behind the government interventions provides such instru-ments. Using the political factors such as government strength or EuropeanCommission presidency, which we identified as significant factors behind thegovernment’s intervention decision, we showed in Section V that the govern-ment interventions do not have the benefit of increasing the takeover premiumonce their effect on unsuccessful bids is properly taken into account.

Sociological and political factors seem to play a bigger role than economicfactors in explaining nationalism in mergers in our sample, but target gov-ernments may also worry about increasing vulnerability to foreign economicshocks through foreign ownership.31 Such worries are unlikely to be very im-portant in explaining economic nationalism in mergers and acquisitions, how-ever, because most of the acquirers in our sample are from other EU countrieswith which the target country’s economy is already substantially integrated.Some countries in our sample may be viewed as following “stakeholder cap-italism” as opposed to “shareholder capitalism” as discussed in Allen, Car-letti, and Marquez (2009), who also argue that the former countries may bemore protectionist in mergers and acquisitions than the latter. Any such incen-tives to protect stakeholder capitalism in target countries in our sample mustbe subtle though, because many of the acquirers are also from continentalEuropean countries that can be viewed as following stakeholder capitalism.Finally, even if nationalism has an adverse effect on economic efficiency, citi-zens of the target country may have a preference for domestic ownership at theexpense of losing the efficiency benefits. In general, we cannot rule out that thetarget governments are responding to the preferences of their citizens.

Our results have interesting implications for the recent sovereign debt crisisin Europe. It seems that heavily indebted governments may have to sell somegovernment-owned firms to raise funds, and the ability of domestic investors tobid for those assets is likely to be limited in the crisis. These governments will beless likely to afford nationalism than in normal times. Ironically, however, aus-terity measures demanded by the EU and the IMF also seem to have increasednationalist opposition against foreigners among the public. It will be interest-ing to see whether governments will choose to follow the increased nationalistsentiment and how their actions will impact the resolution of the crisis.

Our results also suggest several directions for future research. Since eco-nomic nationalism acts as a takeover defense against foreign acquirers asshown in Section VI, it would be interesting to explore the implications of thesetakeover defenses on managerial entrenchment, company valuation, and di-versification as well as acquisitions by domestic companies. Also, because our

31 See Peek and Rosengren (2000), who also caution, however, that foreign ownership may alsodampen the effect of domestic shocks.


sample consists of the largest mergers in a given country, one open question iswhether nationalism is also present in smaller mergers in some form. Anotherinteresting question we leave for future study is the impact of reduced capitalflows from abroad due to economic nationalism.

Initial submission: June 29, 2010; Final version received: May 29, 2013Editor: Campbell Harvey

Appendix A: Interaction Effects in Multinomial Logit Models

This appendix discusses the estimation of interaction effects in multinomiallogit models and roughly follows Ai and Norton (2003). Consider the followinggeneral estimation model:

E[y|x] = f (x; β), (A1)

where x is a vector (x1, x2, . . . , xk), and f (.) is a possibly nonlinear function thatis known up to the parameter(s) β and is twice-continuously differentiable.Suppose we are interested in the interaction effect between x1 and x2, that is,how the effect of explanatory variable x1 on the dependent variable y changeswith another explanatory variable x2. This interaction effect, denoted by μ12,is given by

μ12 = ∂2E[y|x]∂x1∂x2

. (A2)

Notice that in the usual linear case where

f (x; β) = β0 + β1x1 + β2x2 + β12x1x2 + β3x3 + · · · + βkxk, (A3)

μ12 is given by β12.Two aspects of the linear case are worth noting. First, the interaction effect

is constant throughout the regression sample. Second, it depends only on β12.Hence, a consistent estimator of the latter immediately gives the interactioneffect.

As Ai and Norton (2003) show, neither of these aspects is valid in generalfor a nonlinear f (.), including logit, probit, and multinomial logit functions.The interaction effect μ12 is typically a function of more than one estimatedcoefficient and depends on the specific values of x at which it is evaluated. Sinceμ12 depends on x, we report its average over the regression sample.

In our specific case of multinomial logit, we have

E[yi|x] = f(xi; βi

), (A4)


where i = 1, . . . I indexes the choice made by the government with i = 1 servingas the base case of government neutrality and f

(xi; βi

)is given by

f (xi, βi) =

⎧⎪⎪⎪⎪⎪⎪⎪⎪⎨⎪⎪⎪⎪⎪⎪⎪⎪⎩

1

1 +I∑

m=2exp{βm

1 xm1 + βm

2 xm2 + βm

12xm1 xm

2 + βm3 xm

3 + · · · + βmk xm

k }if i = 1

exp{βi1xi

1 + βi2xi

2 + βi12xi

1xi2 + βi

3xi3 + · · · + βi

kxik}

1 +I∑

m=2exp{βm

1 xm1 + βm

2 xm2 + βm

12xm1 xm

2 + βm3 xm

3 + · · · + βmk xm

k

if i > 1.

(A5)In our case, x1 is a dummy variable for foreign acquirers so, with the differ-

ence operator replacing the differential operator, (A2) is simplified to

μi12 = ∂ f

(xi; βi

)∂x2

∣∣∣∣∣x1 =1

− ∂ f(xi; βi

)∂x2

∣∣∣∣∣x1=0

. (A6)

Notice that each term on the right-hand side (RHS) of (A6) gives marginaleffects with respect to x2 evaluated at specific values of x1.

We first use the “mlogit” command of Stata v.11 to estimate�

β. We then usethe “margins” command to calculate average marginal effects for each indepen-dent variable. The interaction effect, �

μ12, averaged over the regression sample,is then estimated by calculating the marginal effect terms of the RHS of (A6)using again the “margins” command, which also provides standard errors (seealso Cameron and Trivedi (2010), pp. 343–357).

Appendix B: Examples of Government Interventions

In this appendix, we briefly describe some mergers and merger attempts toillustrate nationalism. We also provide examples of support for foreign acquir-ers and opposition to domestic bidders, as these cases are also informative.There are, of course, many cases in which the government does not intervene.Our aim in this appendix is not to provide a detailed description of each merger,but rather to give a flavor of the cases encountered. References in footnotes aregiven in the Internet Appendix.

A. Opposition to Foreign Acquirers

Endesa (Spain): This is a merger case that involved multiple bidders fromthree different countries, saw the ruling Spanish politicians overrule the Span-ish competition board and later change the merger rules against a foreignbidder, induced the European Commission to warn the Spanish governmentagainst nationalist responses, and took about 2 years to resolve. In Septem-ber 2005, Spanish energy company Gas Natural made an unsolicited bid foranother Spanish energy company, Endesa. The Spanish government approved


the bid for Endesa despite the rejection recommendation of the Spanish an-titrust commission and the opposition of Endesa management.32 Endesa wasthen able to obtain an injunction in court against the merger.

The acquisition attempt gained an international dimension in February 2006when the German energy company E.on bid for Endesa. The Spanish govern-ment, through the Spanish energy regulator, imposed additional requirementsfor the E.on bid.33 The European Commission demanded the withdrawal of anyrequirements that effectively applied only to foreign acquirers.34 The Spanishgovernment responded by encouraging Spanish Acciona and Italian energycompany Enel to build a blocking minority share after the end of the officialbidding period despite the objections of the Spanish stock market regulator.Acciona and Enel eventually built enough stakes in 2007 to acquire Endesathrough a holding company that was owned 50.01% by Spanish Acciona. Thiswas a case in which not only did a domestic government oppose a foreign bidderand support domestic bidders, but the nationalist policy was so overt that itattracted explicit warning from the European Commission.35

Banca Nazionale del Lavoro (Italy):36 In March 2005, Spanish bank BBVAbid for Italian bank Banca Nazionale del Lavoro (BNL). The bid required theapproval of the Italian Central Bank.37 Central bank governor Antonio Faziorejected the bid with the support of the Berlusconi government. The commu-nication minister, Maurizio Gasparri, summarized the Italian government’sposition as follows: “Yes to competition, no to colonization [of Italian banks]!”38

When the European Commission warned the Italian government,39 the Ital-ian Central bank tried to arrange a leveraged white knight bid by Unipol,an insurer much smaller than BNL, the target. Unipol made a higher bid40

and BBVA withdrew its offer. Central bank governor Fazio had to resignwhen taped phone conversations41 that he made in arranging the white knightbid surfaced. The new central bank governor did not approve Unipol’s whiteknight takeover of BNL for prudential reasons. BBVA did not renew itsbid.42

32 See Crawford (2006).33 See Crawford and Williamson (2006) and Mulligan (2006).34 See Buck, Milne, and Mulligan (2006).35 See Mulligan (2007).36 Our summary is largely based on, among others, Michaels and Mulligan (2005), Buck and

Crawford (2005), Michaels (2005a, 2005b), and Buck (2005b) as well as those cited in the textbelow.

37 See Barber et al. (2005).38 See Barber et al. (2005).39 See Buck (2005a).40 See Financial Times (July 19, 2005).41 See Minder (2005).42 See Michaels (2006).


Scania (Sweden):43 In September 2006, German truck maker MAN bid forthe Swedish truck maker Scania.44 Sweden’s Prime Minister Fredik Reinfeldtexpressed his government’s opposition as follows: “I hope that this Swedishindustrial crown jewel remains Swedish. . . . I feel very strongly for those whomake efforts to keep ownership in Sweden and do something to keep headquar-ters here in Sweden.”45 MAN subsequently withdrew its bid.46

B. Support for Domestic Acquirers

Olivetti controlling Telecom Italia (Italy):47 Olivetti acquired control ofTelecom Italia through a pyramid structure in 1999. The subsequent decline inthe technology sector left Olivetti highly indebted and made its fellow investorsvulnerable. In July 2001, the Pirelli and Benetton families captured control ofOlivetti, through their own pyramid structure, to control Telecom Italia.48 Thegovernment’s support for the joint bid is explained by the communications min-ister Maurizio Gasparri: “There was the risk of a takeover from foreign buyers.That would have been in line with the logic of the market. But it also wouldhave put another large piece of Italy in the hands of a foreigner.”49

Aventis (France):50 In April 2004, French pharmaceutical company Sanofibid for the larger French pharmaceutical company Aventis. The French gov-ernment supported the bid despite the objections of Aventis management.51

When rumors surfaced that Swiss pharmaceutical company Novartis wasconsidering a white knight bid for Sanofi, the government warned Novar-tis against it and provided financing for the acquisition through CDC-Ixis,a state-owned bank.52 No white knight bid materialized and Sanofi acquiredAventis. Prime Minister Raffarin explained the reasons behind the govern-ment’s support: “We are concerned about the fate of vaccines [against terroristattack].”53

43 Our summary is largely based on, among others, Dow Jones News Service (September 12,2006), Mackintosh and Milne (2006), Dow Jones News Service (October 12, 2006), (November 17,2006), and (November 30, 2006), as well as those cited in the text below.

44 See Milne (2006).45 As reported by Dow Jones News Service (December 7, 2006).46 See Dow Jones Business News (January 23, 2007).47 Our summary is largely based on, among others, Ratner (2001), Guha (2001), Ratner, Guha,

and Kapner (2001a), (2001b), Kapner, Guha, and Ratner (2001b), and Financial Times (September20, 2001), as well as those cited in the text below.

48 See Kapner (2001a).49 As reported by Kapner (2001b).50 Our summary is largely based on, among others, Arnold and Simonian (2004), Arnold and

Dombey (2004), Arnold and Johnson (2004), Milne and Simonian (2004), and Arnold, Dyer, andSmolka (2004), as well as those cited in the text below.

51 See Arnold (2004a).52 See Arnold (2004b).53 As reported in Johnson (2004).


C. Support for Foreign Acquirers

Support for foreign acquirers is rare, as demonstrated in the Data section,but it is useful to examine a case in which it did happen.

AGF (France):54 In October 1997, Italian insurance company Generali bidfor the French insurance company AGF. The French government opposed theacquisition and delayed giving a technical approval that was necessary for thebid to be presented to AGF’s shareholders.55 In the meantime, AGF searchedfor a white knight and found one in the German insurance company Allianz.56

Allianz earned the French government’s support by promising to keep themanagement and operations in France and acquired AGF.57

D. Opposition to Domestic Acquirers

Opposition to domestic acquirers is also rare, but it is helpful to discuss onesuch case.

Iberdrola (Spain):58 In March 2003, Spanish natural gas distribution andenergy company Gas Natural attempted to acquire Iberdrola, another Spanishenergy company.59 Gas Natural, a Catalonia-based company, obtained financ-ing from several banks controlled by the Catalan regional government.60 Theacquisition attempt was vetoed by the Spanish Energy Commission of theMadrid government with votes based along party and regional lines.61

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