The effects of discriminatory protections on cross-border mergers and acquisitions

Abstract

Institutionalized discrimination between foreign and domestic investors exists in many countries. We examine the differential effects of foreign investor protection (FIP) and domestic investor protection (DIP) on cross-border mergers and acquisitions (M&As). To guide our empirical analysis, we first present a model in which, when faced with differentiated FIP and DIP, a firm chooses between investing domestically and investing in a foreign country via M&A. The model predicts that cross-border M&As are more likely to occur when in the target country FIP becomes stronger or DIP becomes weaker. The effects are more pronounced in contract-intensive industries. We then construct a data set of worldwide cross-border M&A deals over the period of 1988–2014 and empirically test the model predictions. Our empirical findings support the theoretical predictions. In addition, we find that the effects are stronger (a) for M&As with larger acquired shares, (b) in target countries farther away from the home countries, and (c) in target countries with better financial development.