Investor Protection and the Mode of Acquisition: Implications for Ownership Dilution and Formation of Pyramids

Abstract

This paper examines the influence of investor protection on the form of M&A transaction and its subsequent impact on ownership dilution and creation of corporate pyramids. In a large sample of acquisitions around the world, I find that (stock-based) mergers are more likely in countries with good investor protection, while (cash-based) control transactions are more prevalent in countries with low investor protection. Repeated acquisitions in common law countries results in substantial dilution of proportional ownership especially in U.S. but not in civil law countries. In contrast, series of acquisitions in civil law countries linked through firms that are bidders in one acquisition but targets in another tend to generate a corresponding series of inter-corporate control links, while this correspondence is much weaker in common law countries. These results suggest that differences in acquisition modes could be one potential channel through which investor protection affects corporate control structures around the world.