Corporate Governance Convergence by Contract: Evidence from Cross-Border Mergers

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. This article extends the existing literature by evaluating the effect of changes in corporate governance induced by cross-border mergers on industry value, instead of focusing on cross-country comparisons. We construct measures of the change in investor protection induced by cross-border mergers in a sample of 9,277 industry-country-year observations. We find that the Tobin's Q of an industry increases when firms within the industry are acquired by foreign firms coming from countries with better corporate governance. In addition, we show that acquisitions of firms in countries with less protective regimes--French and German legal origin--have a negative impact on the acquiror's value. Conversely, target industries benefit from acquisitions by firms from countries with better corporate governance--English and Scandinavian legal origin. Ours is among the first studies to document in a panel-data framework that improving investor protection creates value.