International Corporate Governance Spillovers: Evidence from Cross-Border Mergers and Acquisitions

Abstract

We test the hypothesis that foreign direct investment promotes corporate governance spillovers in the host country non-target firms. Using firm-level data from 22 countries, we find that cross-border M&A activity is associated with subsequent improvements in the governance of target firms' rivals. The spillover is more pronounced when the acquirer's country has stronger investor protection than the target's country, and when the target operates in a competitive industry. Cross-border M&As also lead to increases in valuation and reductions in overinvestment of non-target firms. Our results suggest that the international market for corporate control promotes functional convergence in corporate governance.

Keywords: Corporate governance, Cross-border mergers and acquisitions, Foreign direct investment, Spillovers

JEL Classification: G32, G34, G38