A BIT Goes a Long Way: Bilateral Investment Treaties and Cross-Border Mergers
53 Pages Posted: 21 Nov 2016 Last revised: 16 Sep 2017
Date Written: September 2017
We examine whether an external governance mechanism, Bilateral Investment Treaties (BITs), remove impediments to cross-border mergers by protecting the property rights of foreign acquirers. We find that BITs have a large, positive effect on cross-border mergers. The probability and dollar volume of mergers between two given countries more than doubles after the signing of a BIT. Most of this increase is driven by deals flowing from developed economies to developing economies. The effect of BITs is concentrated in target countries with medium levels of political risk, consistent with views that BITs are ineffective for countries with very high country risk and unnecessary for countries with low country risk. Overall the results suggest that some countries outsource legal protection when institutions are not fully developed.
Keywords: cross-border merger, acquisitions, legal institutions, investment treaty
JEL Classification: G34, K33
Suggested Citation: Suggested Citation