A Theory of Optimal Expropriation, Mergers and Industry Competition

A Theory of Optimal Expropriation, Mergers and Industry Competition

Arturo Bris, Neil Brisley

Series number :

Serial Number: 
108/2005

Date posted :

December 01 2005

Last revised :

SSRN Share

Keywords

  • Corporate governance • 
  • market regulation • 
  • mergers and acquisitions

We model a competitive industry where managers choose quantities and costs to maximize a combination of firm profits and benefits from expropriation. Expropriation is possible because of corporate governance ‘slack’ permitted by the government.

We show that corporate governance slack induces managers to choose levels of output and costs that are higher than would otherwise be optimal. This, in turn, benefits consumers - the equilibrium price is lower - and other stakeholders such as suppliers and employees. Depending on the government’s social welfare objective, less-than-perfect investor protection can be optimal. We show why some mechanisms suggested by the literature as improving investor protection - legal change, cross-listing, domestic mergers - may not be effective. We provide a theoretical argument showing the efficacy of cross-border mergers. The stronger corporate governance of a foreign acquirer, imposed on the domestic target firm, benefits merging shareholders and those of competing unmerged domestic firms.

Authors

Real name:
Neil Brisley