The role of country risk for M&A activity in Latin America

Abstract

Latin America is widely seen as a homogeneous region of emerging markets, but foreign investment via M&A diverges strongly across its countries. The present thesis seeks to explain this cross-country disparity by country specific risks and distinguishes between financial, economic and political risk components. Higher country risk is assumed to increase shadow costs of information and informational asymmetries between the foreign acquirer and the local target seller. This makes investors refrain from investing in the respective countries. Addressing a country’s M&A activity as a whole, this thesis complements the literature on “deal breaking” in M&A by mergers that were neither announced nor negotiated. This absence of M&A activity is assumed to be explained by country risk. Bloomberg provides the country risk scores of eight countries which are set into relation with the Thomson Reuters International Merger Database by means of a logistic regression and a Tobit model. The results widely confirm the hypotheses both regarding the negative impact of country risk on the decision whether to invest, and on the level of M&A intensity which can be observed in the country.