Formal versus informal institutions and the competitive impact of international mergers and acquisitions

The institutional based view of strategy aims at bringing institutional factors to our understanding of how and why firms develop successful strategies. Existing literature has thus investigated the importance of institutions for international entry strategies, the development of innovative strategies, or the degree of vertical integration that firms should adopt. What is still currently missing, however, is an exploration of how institutional dimensions impact competitive rivalry. In this paper, we tackle this question by examining how differences in the degree of development of the institutional environments where acquiring, target and rival firms operate, impact rivals’ performance upon the M&A announcements of their competitors. We argue that formal and informal institutions should have opposite effects: while large differences in informal institutions between the acquirer and the target should make a M&A more difficult to implement and should thus positively impact rivals, the opposite should be true for differences in formal institutions. In addition, the rivals’ own institutional environment should affect their ability to handle the competitive threats from the M&As of competitors, and should therefore mitigate the main effects. We test this theory on a sample of M&As and find broad empirical support.