The value of risk-taking in mergers: Role of ownership and country legal institutions

We investigate whether high-risk-taking firms choose to acquire low-risk-taking firms by paying higher premiums and how the governance environment – embedded in country legal institutions and ownership structures – affects the perceived valuation effect of such acquisitions. We find evidence of a higher perceived valuation effect from an M&A deal when a higher risk-taking firm acquires lower risk-taking targets, which we call risk-taking transfer. However, benefits from such perceived valuation effects go entirely to the targets. The valuation impact of risk-taking transfer is greater when bidders feature better ownership quality (lower fraction of closely held shares), and the acquirer country strongly protects investors’ rights. The results are stronger for vertical and cross-border M&As and when acquirers secure full control of targets.