The liability of opaqueness: State ownership and the likelihood of deal completion in international acquisitions by Chinese firms

Research Summary: State-owned enterprises (SOEs) are often more opaque than other types of firms. This opaqueness tends to generate resistance when SOEs undertake cross-border acquisitions. Opaqueness can also aggravate concerns about an SOE's semipolitical nature and its susceptibility to agency problems, making gaining legitimacy harder. Data on attempted foreign acquisitions by Chinese firms were analyzed to compare the likelihood of deal completion between SOEs and firms with other forms of ownership. The SOEs' completion rate was 14% lower than that of other firms. Their disadvantage was shown to be alleviated when they could provide credible signals by being publicly listed (though only on an exchange in a well-developed economy or by hiring reputable auditors). We also find that the disadvantage of SOEs was partially mediated by their opaqueness. Managerial Summary: Opaqueness, or lack of transparency, is critical in many business transactions. In this article, we argue that the concept of opaqueness can help us understand why SOEs tend to have a lower likelihood of deal completion in cross-border acquisitions. Our evidence suggests that opaqueness influences the relationship between state ownership and deal completion, and firms can improve their chance of success in cross-border acquisitions by providing credible information, such as by listing on an exchange in a developed market or hiring a reputable auditor. These help mitigate the hazard of opaqueness.