The effect of domestic to foreign ownership change on firm performance in Europe

This paper examines the relationship between ownership change from domestic to foreign and firm performance. Using European private company data for the period of 2008-2014 and the propensity score matching method, we pair 850 companies that experience ownership change with similar companies that do not. Consistent with the managerial discipline hypothesis, the results show that foreign investors acquire larger and less profitable firms and come from bigger, wealthier, and better-governed countries. After matching firms on propensity scores for country, industry, size, return on assets and leverage, we find that, in the short term, ownership change is associated with higher sales growth but lower return on assets (ROA) and profit margin. In the long term, however, ownership change is positively related to operational efficiency (sales per employee and asset turnover). Our results also show that the origin of the acquirer matters for firm performance; the targets acquired by foreign owners from better-governed countries experience better performance improvement compared to targets acquired by foreign owners from countries with weaker governance.