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A Theory of Optimal Expropriation, Mergers and Industry Competition

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  • Arturo Bris
  • Neil Brisley

Abstract

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.

Suggested Citation

  • Arturo Bris & Neil Brisley, 2008. "A Theory of Optimal Expropriation, Mergers and Industry Competition," Yale School of Management Working Papers amz2522, Yale School of Management, revised 01 Jun 2009.
    • Handle: RePEc:ysm:wpaper:amz2522
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    References listed on IDEAS

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    3. 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.
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