Abstract
This paper examines the relationship between legal shareholder rights and acquirer returns. Europe is an ideal context to explore this link because various institutional differences make the European Takeover Directive a suitable focus for a natural experiment. We find that an improvement of legal shareholder rights entails an increase in acquirer returns, supporting the hypothesis that strong shareholder rights constrain the discretion of corporate insiders, leading to better investment decisions. However, this value creation is partly consumed by the costs of the reform. The gains from improving legal shareholder rights are decreasing in the relative disruption of prevailing governance practices.
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