Working Paper: CEPR ID: DP8397
Authors: Mike Burkart; Denis Gromb; Holger M. Mueller; Fausto Panunzi
Abstract: We study the role of legal investor protection for the efficiency of the market for corporate control. Stronger legal investor protection limits the ease with which an acquirer, once in control, can extract private benefits at the expense of non-controlling investors. This, in turn, increases the acquirer?s capacity to raise outside funds to finance the takeover. Absent effective competition for the target, the increased outside funding capacity does not make efficient takeovers more likely, however, because the bid price, and thus the acquirer?s need for funds, increase in lockstep with his pledgeable income. In contrast, under effective competition, the increased outside funding capacity makes it less likely that the takeover outcome is determined by the bidders? financing constraints--and thus by their internal funds--and more likely that it is determined by their ability to create value. Accordingly, stronger legal investor protection can improve the efficiency of the takeover outcome. Taking into account the interaction between legal investor protection and financing constraints also provides new insights into the optimal allocation of voting rights, sales of controlling blocks, and the role of legal investor protection in cross-border mergers and acquisitions.
Keywords: investor protection; efficiency; corporate control; takeovers
JEL Codes: G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stronger legal investor protection (G38) | Limits ability of bidders to extract private benefits (D44) |
| Limits ability of bidders to extract private benefits (D44) | Increases capacity to raise outside funds (G31) |
| Stronger legal investor protection (G38) | Increases capacity to raise outside funds (G31) |
| Increased capacity to raise outside funds (O36) | Does not necessarily lead to more efficient takeovers (G34) |
| Stronger legal protections (K16) | Enhances probability that the most efficient bidder wins under effective competition (D44) |