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By Karen-Janine Cohen
Like your mother said, reputation can make all the difference. That holds true for countries as well as for people, according to research by William Newburry, chair of international business at FIU Business, and colleagues. In a study titled "How Country Reputation Differentials Influence Market Reaction to International Acquisitions," published in the September 2021 issue of the Journal of Management Studies, the researchers were able to quantify how perceptions of a country's integrity influence investor decisions.
The research focused on international acquisitions, such as when Chinabased Lenovo bought IBM; or U.S.- headquartered Johnson & Johnson acquired Actelion of Switzerland. The research used established benchmarks of country reputation, which includes how much a nation is admired, respected and trusted. The study showed that when a company from a highly respected country (Canada, Switzerland and Sweden are currently the top three; the U.S. ranks about halfway down the list) buys a company based in a lowerrespected country, stock traders anticipate the acquired company will benefit from the reputation of its new parent company's country. This often results in a rise of the parent company's share price. The study, which analyzed 4,792 international acquisitions by 3,012 public firms from 41 home countries in 47 target countries, suggests that, on average, the market value for an acquirer will increase by $50.1 million when the acquirer's country reputation is one standard deviation greater than the target's country reputation. "The reputation difference suggests that the [acquiring] company will be able to improve the value of the company it buys by bringing greater skills in managing the acquired firm, along with greater prestige," said Newburry.
The reputation difference suggests that the [acquiring] company will be able to improve the value of the company it buys by bringing greater skills in managing the acquired firm, along with greater prestige.
William Newburry
That effect lessens, however, when there is more news reporting on the acquired company, when there is more analyst coverage of the firm, and if the parent company has a history of successful acquisitions. "The more information that is available about the companies and their prior track record, the less investors relied on a country's reputation," Newburry said.
Newburry has long studied how reputation affects companies, including both actions by executives and choices companies make as they navigate the marketplace. It's a key part of international business, he said, and can be increasingly important in an age where information is more available and upcoming generations are more interested in the social and cultural aspects of company decisions and performance. "Reputational risk is one of the big issues corporations are facing," he said.
