Institutionalized discrimination between foreign and domestic investors exists in many countries. We examine the differential effects of foreign investor protection (FIP) and domestic investor protection (DIP) on cross-border mergers and acquisitions (M&As). To guide our empirical analysis, we first present a model in which, when faced with differentiated FIP and DIP, a firm chooses between investing domestically and investing in a foreign country via M&A. The model predicts that cross-border M&As are more likely to occur when in the target country FIP becomes stronger or DIP becomes weaker. The effects are more pronounced in contract-intensive industries. We then construct a data set of worldwide cross-border M&A deals over the period of 1988–2014 and empirically test the model predictions. Our empirical findings support the theoretical predictions. In addition, we find that the effects are stronger (a) for M&As with larger acquired shares, (b) in target countries farther away from the home countries, and (c) in target countries with better financial development.
Bibliographical noteFunding Information:
Haoyuan Ding acknowledges the financial support from the National Natural Science Foundation of China (no. 71703086 ; no. 72173082 ) and the financial support from the Ministry of Education Project of Key Research Institute of Humanities and Social Sciences at Universities in China. Haichao Fan acknowledges the financial support by the Shanghai Institute of International Finance and Economics; the Innovative Research Groups Project of the National Natural Science Foundation of China (No. 72121002 ). Chang Li acknowledges the financial support from the National Natural Science Foundation of China (no. 71803048).
- Cross-border M&As
- Foreign investor protection
- Domestic investor protection
- Contract intensity