A Theory of Optimal Expropriation, Mergers and Industry Competition

37 Pages Posted: 3 Mar 2008 Last revised: 22 Jan 2019

See all articles by Neil Brisley

Neil Brisley

University of Waterloo - School of Accounting and Finance

Arturo Bris

IMD International; European Corporate Governance Institute (ECGI); Yale University - International Center for Finance

Christos Cabolis

IMD; Yale SOM International Center for Finance

Date Written: January 1, 2008

Abstract

We model a competitive industry where managers choose quantities and costs to maximize a combination of firm profits and benefits from expropriation. Expropriation is possible because of corporate governance ‘slack’ permitted by the government. We show that corporate governance slack induces managers to choose levels of output and costs that are higher than would otherwise be optimal. This, in turn, benefits consumers - the equilibrium price is lower - and other stakeholders such as suppliers and employees. Depending on the government’s social welfare objective, less-than-perfect investor protection can be optimal. We show why some mechanisms suggested by the literature as improving investor protection - legal change, cross-listing, domestic mergers - may not be effective. We provide a theoretical argument showing the efficacy of cross-border mergers. The stronger corporate governance of a foreign acquirer, imposed on the domestic target firm, benefits merging shareholders and those of competing unmerged domestic firms.

Keywords: international corporate governance, market regulation, cross-listing, domestic and cross-border mergers and acquisitions

JEL Classification: F3, F4, G3

Suggested Citation

Brisley, Neil and Bris, Arturo and Cabolis, Christos, A Theory of Optimal Expropriation, Mergers and Industry Competition (January 1, 2008). Yale ICF Working Paper No. 05-28; ECGI - Finance Working Paper No. 108/2005. Available at SSRN: https://ssrn.com/abstract=866851 or http://dx.doi.org/10.2139/ssrn.866851

Neil Brisley (Contact Author)

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x38887 (Phone)

Arturo Bris

IMD International ( email )

Ch. de Bellerive 23
P.O. Box 915
CH-1001 Lausanne
Switzerland

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
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Belgium

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

Yale University - International Center for Finance ( email )

Box 208200
New Haven, CT 06520
United States

Christos Cabolis

IMD ( email )

Ch. de Bellerive 23
P.O. Box 915
CH-1001 Lausanne
Switzerland
+41 21 618 0742 (Phone)
+41 21 618 0707 (Fax)

Yale SOM International Center for Finance ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-7108 (Phone)
203-432-8931 (Fax)

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