The Hidden Costs of Being Public: Evidence from Multinational Firms operating in Emerging Markets
83 Pages Posted: 10 Mar 2017 Last revised: 10 Sep 2018
Date Written: July 12, 2018
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 in emerging markets. When the level of market regulations increases, private firms acquire listed ones, and when the level decreases the results are reversed. I find that this effect is stronger in industries more prone to bribery, suggesting that the ability to "grease the wheels" plays an important role. Taken together, these results uncover an additional cost faced by listed companies, identify a new driver of M&A transactions in emerging markets, and show evidence that high levels of regulation lead to opaque corporate structures.
Keywords: International Finance, Mergers and Acquisitions, Ownership Structure, Emerging Markets, Regulation
JEL Classification: G32, G34, G38
Suggested Citation: Suggested Citation