Foreign ownership and M&A activity: Evidence from China

This paper examines the effect of foreign investors' shareholdings on merger and acquisition (M&A) activities in Chinese listed companies, using manually collected data on foreign investors from 30 international jurisdictions between 2010 and 2020. The empirical findings highlight the significant influence of foreign ownership in reducing the frequency of corporate M&A activities and improving M&A performance. Notably, these effects are primarily driven by foreign institutional ownership rather than foreign individual ownership. Additionally, the negative effect of foreign ownership on M&A frequency is robust to alternative measures of foreign ownership and various model specifications, including instrumental variable estimation. Interestingly, the negative effect is particularly pronounced in firms with extensive analyst coverage and without short-selling constraints, suggesting that foreign investors' involvement plays a complementary role in established governance structures. Our channel analyses also reveal that foreign investors from jurisdictions with strong corporate governance exert a more substantial monitoring effect. However, the reduction effect is weakened in cases where there is a high cultural distance between mainland China and the jurisdiction of origin of each foreign investor.