The impact of regional financial depth on outbound cross-border mergers and acquisitions

Drawing on China's experience, this study examines the role of source-province credit conditions and its interplay with host-country financial openness in determining the intensity of cross-border mergers and acquisitions (M&As). We first show that improved credit conditions in source provinces of China, measured by the number of newly established bank branches, boost the volume and frequency of their firms’ cross-border M&As. The effect is stronger for deals where cash is mainly used as the payment method. Then, we identify a complementary effect between the financial openness in host countries and the improved financial depth in source regions. More importantly, by defining the members of China's “the Belt and Road Initiative” as countries with higher political openness to China, we find that acquirers in China, especially the firms affiliated to central government, are more political-oriented than market-oriented when choosing target countries. Additionally, we show that acquirers facing lower political uncertainty from source province benefit more from the enhanced bank access.