A Theory of Optimal Expropriation, Mergers and Industry Competition
We model a competitive industry where managers choose quantities and costs to maximize a combination of firm profits and private 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.
|Date of creation:||01 Mar 2008|
|Date of revision:||01 Jun 2009|
|Contact details of provider:|| Web page: http://icf.som.yale.edu/|
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"The Political Economy of Corporate Governance,"
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"Investor Protection and Corporate Governance,"
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- Arturo Bris & Christos Cabolis, 2008.
"The Value of Investor Protection: Firm Evidence from Cross-Border Mergers,"
Review of Financial Studies,
Society for Financial Studies, vol. 21(2), pages 605-648, April.
- Arturo Bris & Christos Cabolis, 2005. "The Value of Investor Protection: Firm Evidence from Cross-Border Mergers," Yale School of Management Working Papers amz2455, Yale School of Management.
- La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998.
"Law and Finance,"
3451310, Harvard University Department of Economics.
- Rafael LaPorta & Florencio Lopez de-Silanes & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," Harvard Institute of Economic Research Working Papers 1768, Harvard - Institute of Economic Research.
- Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, . "Law and Finance," Working Paper 19451, Harvard University OpenScholar.
- Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc.
- Katharina Pistor & Yoram Keinan & Jan Kleinheisterkamp & Mark D. West, 2003. "Evolution of Corporate Law and the Transplant Effect: Lessons from Six Countries," World Bank Research Observer, World Bank Group, vol. 18(1), pages 89-112.
- Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May.
- Arturo Bris & Salvatore Cantale & George P. Nishiotis, 2007.
"A Breakdown of the Valuation Effects of International Cross-listing,"
European Financial Management,
European Financial Management Association, vol. 13(3), pages 498-530.
- Arturo Bris & Salvatore Cantale & George Nishiotis, 2006. "A Breakdown of the Valuation Effects of International Cross-Listing," Yale School of Management Working Papers amz2602, Yale School of Management, revised 01 Aug 2006.
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