The Hidden Costs of Being Public: Evidence from Multinational Firms Operating in an Emerging Market

Abstract

This paper studies how firms deal with business regulations that limit their operations. I first exploit a natural experiment to show that the ownership structure of a firm affects its degree of compliance with regulations, with publicly listed firms complying more than privately held ones. Then I show that this differential compliance imposes a burden on listed firms that helps explain the patterns of M&A activity. When the level of market regulations increases, private firms acquire listed ones, and listed firms stop acquiring private ones. These results uncover an additional cost faced by listed companies, identify a new driver of M&A transactions, and show evidence that high levels of regulation lead to opaque corporate structures.

Keywords: Mergers and Acquisitions, Stock Market Listing, Ownership Structure

JEL Classification: G32, G34, G38