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

This paper examines how investor protection affects mode of acquisition and shapes subsequent control structures. I find that (stock‐based) mergers are more likely when investors are well protected, while (cash‐based) control transactions are more prevalent under weak protection. Repeated acquisitions by common law firms result in substantial ownership dilution especially in the United States, but not in civil law countries. Alternatively, a series of acquisitions in civil law countries linked through firms that are bidders in one acquisition, but targets in another, tends to generate a corresponding series of intercorporate control pyramids, while such correspondence is much weaker in common law countries.