Corporate governance reforms around the world and cross-border acquisitions

This paper provides comprehensive, detailed documentation of major corporate governance reforms (CGRs) undertaken by 26 advanced and emerging economies. We investigate whether these reforms have altered investor protection (IP) and impacted corporate investments. Specifically, we estimate the CGRs' impacts on foreign acquirers' tendency to pick better performing firms in emerging markets. We argue the cherry picking is partly due to emerging countries' weaker IP than acquirer countries', predicting a positive relation between the degree of cherry picking and the gap in the strength of IP. Thus, if the CGRs strengthen IP, the gap will decrease (increase) following a CGR in a target's (acquirer's) country, moderating (intensifying) the cherry picking tendency. This is what we find when we estimate difference-in-differences in cherry picking before and after a CGR. These results not only demonstrate the important impacts the CGRs had, but also imply the IP gap between capital exporting and importing countries distorts firm-level allocation of foreign capital inflows and reduces the benefits of globalization.