Corporate Governance Reforms and Cross-Border Acquisitions

47 Pages Posted: 22 Jul 2011  

E. Han Kim

University of Michigan, Stephen M. Ross School of Business

Yao Lu

University of Michigan - Stephen M. Ross School of Business; Tsinghua University, SEM

Date Written: July 19, 2011

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.

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

JEL Classification: F21, G15, G34, K22

Suggested Citation

Kim, E. Han and Lu, Yao, Corporate Governance Reforms and Cross-Border Acquisitions (July 19, 2011). Available at SSRN: https://ssrn.com/abstract=1889849 or http://dx.doi.org/10.2139/ssrn.1889849

E. Han Kim (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-764-2282 (Phone)
734-763-3117 (Fax)

Yao Lu

University of Michigan - Stephen M. Ross School of Business ( email )

701 Tappan St. Rm R4323
Ann Arbor, MI 48109
United States
7347093843 (Phone)

HOME PAGE: http://sitemaker.umich.edu/yaolu_michigan/yao_lu_s_homepage

Tsinghua University, SEM ( email )

Wenlun Building 347#
Beijing, 100084
China
8610-62797399 (Phone)

HOME PAGE: http://sitemaker.umich.edu/yaolu_michigan/yao_lu_s_homepage

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