Does Democracy Shape International Merger Activity?

80 Pages Posted: 10 Jun 2022 Last revised: 23 Apr 2024

See all articles by Muhammad Farooq Ahmad

Muhammad Farooq Ahmad

SKEMA Business School – Université Côte d'Azur

Thomas Lambert

Rotterdam School of Management, Erasmus University; Erasmus Research Institute of Management (ERIM)

Jose M. Martin-Flores

CUNEF Universidad

Arthur Romec

Toulouse Business School

Date Written: September 2, 2022

Abstract

In this paper, we study the role of democracy in international merger activity. Using a sample of 101,834 cross-border deals announced between 1985 and 2018, we show that merger flows involve acquirers from more democratic countries than their targets. This result is primarily driven by a pull factor, that is, firms in countries with weaker democratic institutions attract cross-border deals. Democratic institutions have a fundamental influence on international merger activity because they are conducive to better corporate governance standards. Further decomposing the effect reveals that democratic institutions also play a direct role that is not due to investor protection or economic development. Our findings imply that democracy is an important, omitted determinant of cross-border mergers.

Keywords: mergers and acquisitions, cross-border deals, democracy, political economy, investor protection

JEL Classification: F21, G34, P16

Suggested Citation

Ahmad, Muhammad Farooq and Lambert, Thomas and Martin-Flores, Jose-Maria and Romec, Arthur, Does Democracy Shape International Merger Activity? (September 2, 2022). Available at SSRN: https://ssrn.com/abstract=4122647 or http://dx.doi.org/10.2139/ssrn.4122647

Muhammad Farooq Ahmad

SKEMA Business School – Université Côte d'Azur ( email )

Campus de Lille, Avenue Willy Brandt,
Lille, 59777
France

HOME PAGE: http://sites.google.com/site/mfarooqahmad85

Thomas Lambert

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

HOME PAGE: http://www.thomaslambert.org

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Jose-Maria Martin-Flores

CUNEF Universidad ( email )

Calle de Pirineos, 55
Madrid, Madrid 28040
Spain

Arthur Romec (Contact Author)

Toulouse Business School ( email )

20, bd Lascrosses
Toulouse, 31068
France

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