Christos Cabolis

The Value of Investor Protection: Firm Evidence from Cross-Border Mergers

International law prescribes that in a cross-border merger where the acquiror buys 100 percent of the target, the target firm becomes a national of the country of the acquiror. Among other effects, the change in nationality implies a change in investor protection, because the law that is applicable to the newly merged firm changes as well. Therefore, cross-border mergers provide a natural experiment to analyze the effects of changes - both improvements and deteriorations - in corporate governance on firm value. We construct measures of the change in investor protection induced by cross-border mergers in a sample of 506 acquisitions from 39 countries, spanning the period 1989 to 2002. We find that the announcement effect of a cross-border merger for the target firm is higher - relative to a matching, domestic acquisition - the better the shareholder protection and the accounting standards in the country of origin of the acquiror. This result is only significant in acquisitions where the acquiror buys 100 percent of the target, and therefore where the nationality of the target firm changes. In addition, this result is only significant when the acquiror comes from a more-protective country, which suggests that target firms avoid addopting weaker protection via private contracting. Interestingly, we do not find a symmetric effect on the acquirors return. All in all, we present evidence that the transfer of better corporate governance practices through cross-border mergers is positively valued by markets with weaker corporate governance.

The effect of merger laws on merger activity: International evidence

Publisher Summary This chapter is an attempt to isolate the direct effect of competition laws on a countrys merger activity and indirectly on corporate value. Although the direct relationship between merger laws and Tobins Q is positive and significant, the relationship vanishes once it is controlled for the net cross-border merger flows in a particular country. To the extent that the trend toward globalization in the world has dramatically increased merger flows from some countries to others, it is argued that there is a need for competition laws that make up for the pervasive effects of the global market on some countries. The chapter concludes that the positive effect of merger laws on corporate value is driven by their deterring effect on horizontal, cross-border, and anticompetitive mergers.

Does One Bank Size Fit All? The Role of Diversification and Monitoring

Recent studies have presented evidence of scale economies for large banks, providing a rationale for some very large banks seen worldwide. In this study, we focus on the negative side of bank size which relates to monitoring costs. In particular, we show that the relationship between size and bank’s market to book value of assets is contained by the cost of the manager to directly monitor the borrowers and by the (delegation) cost of the owner to monitor the bank manager. Using a sample of US bank holding companies from 2001 to 2015, we provide evidence that the relationship between size and bank’s market to book value of assets is inverse U-shaped and that monitoring costs offset the benefits from economies of scale.

Competition and Specialization in the VC Market: A Non-Monotonic Relationship

We investigate the relationship between competition and firm specialization in the venture capital (VC) market. Staged financing motivates VC firms to fund entrepreneurs in various states of maturity: startup/seed, early, growth, and so forth, and leads to stage specialization. Contrary to the conventional wisdom that competition always promotes specialization, we find an inverted-U relationship, using panel data on VC funding rounds in the U.S. between 1980 and 2006. We develop a matching model with two-sided vertical heterogeneity, bilateral bargaining and moral hazard to demonstrate that the non-monotonicity is driven by the expected utility VC firms offer to entrepreneurs, via equity stakes, where higher quality entrepreneurs (with more promising business plans) receive greater utility. Competition shifts and rotates the utility schedule, which gives rise to two opposing forces on the returns to specialization as competition intensifies. We then search for validation of the mechanism we propose and we find consistent empirical evidence.We investigate the relationship between competition and firm specialization in the venture capital (VC) market. Staged financing motivates VC firms to fund entrepreneurs in various states of maturity: startup/seed, early, growth, and so forth, and leads to stage specialization. Contrary to the conventional wisdom that competition always promotes specialization, we find an inverted-U relationship, using panel data on VC funding rounds in the U.S. between 1980 and 2006. We develop a matching model with two-sided vertical heterogeneity, bilateral bargaining and moral hazard to demonstrate that the non-monotonicity is driven by the expected utility VC firms offer to entrepreneurs, via equity stakes, where higher quality entrepreneurs (with more promising business plans) receive greater utility. Competition shifts and rotates the utility schedule, which gives rise to two opposing forces on the returns to specialization as competition intensifies. We then search for validation of the mechanism we propose and we find consistent empirical evidence.

R&D Investments Fostering Horizontal Mergers

We study a homogenous good triopoly in which firms first choose their cost-reducing R&D investments and consider alternative merger proposals, and then compete a la Cournot in the ensuing industry. We identify conditions under which both horizontal mergers and non integration are sustained by Coalition-Proof Nash equilibria (CPNE). These conditions involve the effectiveness of the R&D technology, as well as the distribution of the bargaining power between the acquirer and the acquiree, which determine the allocation of the incremental profits generated by the merger. We show that whether firms follow duplicative or complementary research paths, sustaining a merger generally requires a sufficiently effective R&D technology that creates endogenous cost asymmetries and renders the merger profitable, and a moderate distribution of bargaining power that allows to spread the benefits of the merger. We examine the welfare effects of mergers and obtain clear policy guidelines.

A Cartel that Lasts for Centuries: The Case of the Eastern Orthodox Church Indulgences

In this paper, we present a non-conventional case of collusive behavior and tactics that last for centuries. In particular, we focus on the process through which the Patriarchates of the Eastern Orthodox Church (specifically, those of Constantinople, Jerusalem, Antioch, and Alexandria) distributed indulgences to believers in their jurisdictions during the period between the sixteenth and the seventeenth centuries. By employing a wide variety of primary sources such as correspondence among the various patriarchates and among individual clerics, printing orders for indulgences, and income-expenditure records among others, we present evidence of oligopolistic interaction and behavior among the various Patriarchates in the distribution of indulgences. The observed long duration of this collusive structure is the outcome of high barriers to entry, well defined market segmentation, effective monitoring, a strong enforcement mechanism and finally little product innovation. Overall, the data suggest that, besides their spiritual importance, indulgences were promoted in a way that resembles very much the distribution method and process of any typical product in a modern market economy.