Working Paper: NBER ID: w17010
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 M&A.
Keywords: Legal Investor Protection; Takeovers; Corporate Control; Market Efficiency
JEL Codes: G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Legal Investor Protection (G24) | Reduction in Private Benefits Extraction (H49) |
| Reduction in Private Benefits Extraction (H49) | Increase in Post-Takeover Share Value (G34) |
| Increase in Post-Takeover Share Value (G34) | Increase in Outside Funding Capacity (O36) |
| Legal Investor Protection (G24) | Increase in Outside Funding Capacity (O36) |
| Stronger Legal Investor Protection + Effective Competition (G18) | Increased Likelihood of Efficient Takeover Outcomes (G34) |
| Absence of Effective Competition + Stronger Legal Investor Protection (G38) | No Relaxation of Bidder's Budget Constraint (D10) |