Investor Protections & the Allocation of Capital Flows

Weak IP (investor protections) in target countries impedes cross-border M&A markets from functioning fully. In particular, weak IP in target countries prevents poorly performing local firms from gaining access to foreign investors. These firms tend to have greater room for improvement, which can be facilitated by foreign capital and managerial know-how. Thus, the negative impact of weak IP is particularly damaging to the spread of the potential benefits of globalization. More generally, the results in this paper highlight the importance of investor protection in guiding international capital flows not only across countries, but also across firms within a country… When weak-IP capital importing countries improve their legal environments, they help alleviate the distortion by inducing foreign acquirers to reach out to underperforming firms, which in turn enhances the allocation efficiency of foreign capital.

Corporate Governance Reforms and the Allocation of International Capital Flows — The Harvard Law School Forum on Corporate Governance and Financial Regulation, 11/8/2010. See also CorpGov WayBack Machine, discussion of Gourevitch and Shinn.


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