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


  • I would like to thank my dissertation adviser Michael Weisbach, Heitor Almeida, Bo Becker, Murillo Campello, Jie Gan, Robin Greenwood, Joongho Han, Brian Henderson, Kyung Suh Park, Josh Pollet, Jhinyoung Shin, Andrei Shleifer, Scott Weisbenner, Daniel Wolfenzon, Bernie Yeung, Longkai Zhao, and other seminar participants at the 2008 CAFM Meetings, Seoul, 2008 CICF Meetings, Dalian, the University of Illinois, Korea University, KAIST Graduate School of Management, KDI School of Public Policy and Management, Queen's University, Virginia Tech, and the University of Arkansas for helpful comments. I would also like to thank Bill Christie (Editor) and an anonymous referee for providing insightful guidance that greatly improved the paper. Part of this work was completed when Kim was a Ph.D. student at the University of Illinois and an assistant professor at Korea University Business School. This work was supported by the Korea Research Foundation Grant funded by the Korean Government (MOEHRD, Basic Research Promotion Fund) (KRF-2008- 327-B00250).


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.