Corporate Governance Reforms and Cross-Border Acquisitions

Abstract:     
We investigate how investor protection (IP) affects target selection when a firm decides to enter a foreign market through an acquisition. A law and finance model shows the acquirer prefers better-performing firms when the target country has weaker IP than its home country. This cherry picking tendency becomes stronger when the gap in IP increases and becomes weaker when the gap decreases. Data on acquisition bids from 13 strong-IP countries for firms located in 20 weak-IP countries reveal that cherry picking intensifies after an acquirer’s home country enacts a corporate governance reform (CGR), enlarging the IP gap between the acquirer and target countries. Conversely, cherry picking moderates after a target country undertakes a CGR, narrowing the IP gap. These results imply that the IP gap between acquirer and target countries distorts firm-level allocation of foreign capital inflows and reduces the benefits of globalization.

Number of Pages in PDF File: 47

Keywords: Investor Protection, International Capital Flows, Target Selections, Private Benefits of Control, Control Premiums

JEL Classification: F21, G15, G34, K22

working papers series