Escaping the stigma of firm operations in emerging markets: Are you willing to pay the price?

Emerging market (EM) firms have been extensively theorized and understood as firms that escape their home country's poor institutions via internationalization to gain strategic assets and capabilities in better market-supporting institutions; however, there is a dearth of research that discusses the hindrances EM firms may face as they internationalize into these more-developed markets. By integrating the stigma literature into institutional escapism view, we discuss that as EM firms seek to acquire firms in more developed markets, they face stigma that is often associated with EM institutional environments, and this forces them to pay higher acquisition premiums as a means to compensate for such stigma. By using panel data comprising 33 EM acquirer countries and 52 EM and developed market (DM) target countries, we found that EM acquirers will increase premiums for target firms that are institutionally distant from their home-country institution. However, this relationship is weakened when the acquiring and target firms possess common colonial traits (colonial heritage and fractionalization). These findings advance institutional escapism and acquisition premium literature by explaining that although stigma results in increased DM firm valuation during their acquisition by EM firms, colonization-based ties mitigate this relationship.