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A Theory of Optimal Expropriation, Mergers and Industry Competition

  • Arturo Bris
  • Neil Brisley
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    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.

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    File URL: http://icfpub.som.yale.edu/publications/2522
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    Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number amz2522.

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    Date of creation: 01 Mar 2008
    Date of revision: 01 Jun 2009
    Handle: RePEc:ysm:somwrk:amz2522
    Contact details of provider: Web page: http://icf.som.yale.edu/

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    1. 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.
    2. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert Vishny, . "Investor Protection and Corporate Governance," Working Paper 19455, Harvard University OpenScholar.
    3. Pagano, Marco & Volpin, Paolo, 2001. "The Political Economy of Corporate Governance," CEPR Discussion Papers 2682, C.E.P.R. Discussion Papers.
    4. 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.
    5. 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.
    6. 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.
      • La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
      • 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.
    7. 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.
    8. Rossi, Stefano & Volpin, Paolo, 2003. "Cross-Country Determinants of Mergers and Acquisitions," CEPR Discussion Papers 3889, C.E.P.R. Discussion Papers.
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