Democracy and Cross-Border Mergers

We study how differences in democracy influence cross-border mergers and share price reactions to cross-border deal announcements. Using a sample of 104,425 cross-border deals announced between 1985 and 2018, we find that merger flows involve acquirers from more democratic countries than their targets. This result is mainly driven by a “pull” factor whereby firms from countries with weaker democratic institutions attract cross-border deals. The effect of democracy is higher if the target country has lower accounting standards and poorer shareholder protection. In addition, target abnormal returns around deal announcements are larger when acquirers come from more democratic countries. Overall, our results are consistent with firms in countries with weak democratic institutions seeking to attract cross-border deals to benefit from a transfer of better corporate governance