Cross‐Border Acquisitions and Optimal Government Policy

11 Pages Posted: 22 Aug 2011  

Gautam Bose

UNSW Australia Business School, School of Economics

Arghya Ghosh

UNSW Australia Business School, School of Economics

Sudipto Dasgupta

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Date Written: September 2011

Abstract

This article analyses the optimality of policy specifications used to regulate the acquisition and operation of local firms by multinational enterprises. We emphasise the consequence of such regulations on the price of the domestic firm in the market for corporate control. We show that it is optimal to impose ceilings on foreign ownership of domestic firms when the government's objective is to maximise domestic shareholder profits, or a sum of those profits and tax revenues. While the optimal ceiling is high enough for the multinational enterprise (MNE) to gain control of the domestic firm, it nevertheless influences the price that the MNE must pay for the domestic firm's shares to the advantage of the domestic shareholders. Surprisingly, stringent restrictions on transfer pricing turn out to be strictly suboptimal in this context.

Keywords: F23

Suggested Citation

Bose, Gautam and Ghosh, Arghya and Dasgupta, Sudipto, Cross‐Border Acquisitions and Optimal Government Policy (September 2011). Economic Record, Vol. 87, Issue 278, pp. 427-437, 2011. Available at SSRN: https://ssrn.com/abstract=1913104 or http://dx.doi.org/10.1111/j.1475-4932.2011.00727.x

Gautam Bose (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Arghya Ghosh

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Sudipto Dasgupta

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong
852-2358-7666 (Phone)
852-2358-1749 (Fax)

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