Institutional mobility in global capital markets

Abstract

When financial conduct in one country intrudes on another country, country-level institutional features (e.g., securities laws and their enforcement) cease to be effective because of jurisdictional limitations. In this study, we focus on how fragmented regulatory authority exposes foreign investors to expropriation and information risks. We explore securities regulators’ use of cooperative instruments that enable country-level institutional features to reach foreign jurisdictions. Using a powerful research design that controls for country-level factors (even time-variant ones), we find cooperation is associated with the volume of deals in the cross-border merger and acquisition (M&A) market. Moreover, we find subtle and previously unexplored legal issues affect firm value in ways that refine the bonding hypothesis. Ultimately, we conclude that institutional features determined at the country-pair level—although largely overlooked by prior work—are key determinants of economic outcomes in global markets.