A BIT Goes a Long Way: Bilateral Investment Treaties and Cross-border Mergers

We examine whether Bilateral Investment Treaties (BITs) remove impediments to foreign investment by helping enforce contracts and protecting the property rights of foreign investors. We find that BITs have a large, positive effect on cross-border mergers. The probability and dollar volume of mergers between two given countries more than doubles after the signing of a BIT. Most of this increase is driven by capital flowing from developed economies to developing economies, shedding light on the long-standing Lucas Paradox as to why most cross-border capital still flows to developed countries. Additionally, most of our results are driven by target countries with “medium” levels of political risk, consistent with popular views that BITs are ineffective for countries with very high risk and not necessary for countries with low political risk.