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Does democracy shape international merger activity?

Author

Listed:
  • Ahmad, Muhammad Farooq
  • Lambert, Thomas
  • Martín-Flores, José M.
  • Romec, Arthur

Abstract

Democracy matters for international merger activity. Using a sample of 101,834 cross-border deals announced between 1985 and 2018, we show that merger flows predominantly involve acquirers from more democratic countries than their targets. This result is primarily driven by a “pull” factor: firms in countries with weaker democratic institutions attract more cross-border deals. We find evidence of bonding as the key mechanism behind this effect. The democracy effect is stronger when target countries have weaker corporate governance standards. Furthermore, target abnormal returns around deal announcements increase with the difference in democracy between acquirer and target countries. Importantly, differences in investor protection or economic development do not directly explain the democracy effect. Combined, our findings imply that democracy is a fundamental, yet previously overlooked, determinant of cross-border mergers.

Suggested Citation

  • Ahmad, Muhammad Farooq & Lambert, Thomas & Martín-Flores, José M. & Romec, Arthur, 2024. "Does democracy shape international merger activity?," Journal of International Economics, Elsevier, vol. 152(C).
    • Handle: RePEc:eee:inecon:v:152:y:2024:i:c:s0022199624001223
    DOI: 10.1016/j.jinteco.2024.103995
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    More about this item

    Keywords

    Mergers and acquisitions; Cross-border deals; Foreign direct investment; Democracy; Political economy; Investor protection;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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