[International law prescribes that in a cross-border acquisition of 100% of the target shares, the target firm becomes a national of the country of the acquiror, and consequently subject to its corporate governance system. Therefore, cross-border mergers provide a natural experiment to analyze the effects of changes in corporate governance on firm value. We construct measures of the change in investor protection in a sample of 506 acquisitions from 39 countries. We find that the better the shareholder protection and accounting standards in the acquiror's country, the higher the merger premium in cross-border mergers relative to matching domestic acquisitions.]

International law prescribes that in a cross-border merger where the acquiror buys 100 percent of the target, the target firm becomes a national of the country of the acquiror. Among other effects, the change in nationality implies a change in investor protection, because the law that is applicable to the newly merged firm changes as well. Therefore, cross-border mergers provide a natural experiment to analyze the effects of changes - both improvements and deteriorations - in corporate governance on firm value. We construct measures of the change in investor protection induced by cross-border mergers in a sample of 506 acquisitions from 39 countries, spanning the period 1989 to 2002. We find that the announcement effect of a cross-border merger for the target firm is higher - relative to a matching, domestic acquisition - the better the shareholder protection and the accounting standards in the country of origin of the acquiror. This result is only significant in acquisitions where the acquiror buys 100 percent of the target, and therefore where the nationality of the target firm changes. In addition, this result is only significant when the acquiror comes from a more-protective country, which suggests that target firms avoid addopting weaker protection via private contracting. Interestingly, we do not find a symmetric effect on the acquiror's return. All in all, we present evidence that the transfer of better corporate governance practices through cross-border mergers is positively valued by markets with weaker corporate governance.

Cross-border mergers allow firms to alter the level of protection they provide to their investors, because target firms usually import the corporate governance system of the acquiring company by law. Therefore, cross-border mergers provide a natural experiment to analyze the effects of changes in corporate governance on firm value, and on an industry as a whole. We construct measures of the change in investor protection induced by cross-border mergers in a sample of 7330 ‘national industry years’ (spanning 39 industries in 41 countries in the period 1990–2001. We find that the Tobin's Q of an industry — including its unmerged firms — increases when firms within that industry are acquired by foreign firms coming from countries with better shareholder protection and better accounting standards. We present evidence that the transfer of corporate governance practices through cross-border mergers is Pareto improving. Firms that can adopt better practices willingly do so, and the market assigns more value to better protection.

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.

Recent studies have presented evidence of scale economies for large banks, providing a rationale for some very large banks seen worldwide. In this study, we focus on the negative side of bank size which relates to monitoring costs. In particular, we show that the relationship between size and bank's market to book value of assets is contained by the cost of the manager to directly monitor the borrowers and by the (delegation) cost of the owner to monitor the bank manager. Using a sample of US bank holding companies from 2001 to 2015, we provide evidence that the relationship between size and bank's market to book value of assets is inverse U-shaped and that monitoring costs offset the benefits from economies of scale.