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A theory of optimal expropriation, mergers and industry competition

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  • Brisley, Neil
  • Bris, Arturo
  • Cabolis, Christos

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 4 (April)
Pages: 955-965

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:4:p:955-965

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: International corporate governance Market regulation Cross-listing Domestic and cross-border mergers and acquisitions;

References

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  16. Lee, Cheng-Few & Lee, Kin-Wai & Yeo, Gillian Hian-Heng, 2009. "Investor protection and convertible debt design," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 985-995, June.
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Cited by:
  1. Constantine Manasakis & Evangelos Mitrokostas & Emmanuel Petrakis, 2013. "Certification of corporate social responsibility activities in oligopolistic markets," Canadian Journal of Economics, Canadian Economics Association, vol. 46(1), pages 282-309, February.
  2. Jacques Thépot, 2013. "Investissement et financement dans un monopole avec bénéfices privés," Working Papers of LaRGE Research Center 2013-02, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.

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