Corporate Governance Reforms and Firm-Level Allocation of International Capital Flows
38 Pages Posted: 31 Jan 2010
Date Written: January 30, 2010
This paper investigates how changes in investor protection (IP) of capital exporting and importing countries affect the firm-level allocation of international capital flows. A simple model illustrates that when a capital exporting country has stronger IP than the importing country, in cross-border acquisitions foreign bidders tend to target better-performing firms. This cherry picking tendency becomes stronger (weaker) when the gap in IP increases (decreases). Data on acquisition bids from 17 strong-IP countries for firms located in 18 weak-IP countries reveal that the cherry picking tendency declines after target countries undertake corporate governance reforms (CGRs), which narrow the gap in IP between the acquirer and target countries. In contrast, foreign acquirers respond to CGRs enacted by their own countries by increasing their cherry picking tendencies. These results imply that the gap in the strength of IP between acquirer and target countries prevent underperforming firms in weak-IP countries from gaining access to foreign capital.
Keywords: Investor Protection, International Capital Flows, Corporate Governance Reforms, Cross-border Acquisitions, Target Selections, Foreign Direct Investments, Private Benefits of Control and Control Premiums
JEL Classification: F21, F23, G34, G38, G39
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