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Takeovers, market monitoring, and international corporate governance


  • We thank two anonymous referees and Ariel Pakes (editor) for very helpful comments. We also thank John Coffee, Craig Doidge, Vehung Errunza, Wayne Ferson, Andrew Karolyi, Karl Lins, Richard Lyons, John McConnell, Herve Moulin, Robert Nash, Laura Starks, Neal Stoughton, Rene Stulz, Sheridan Titman, Josef Zechner, seminar participants at various universities, at the McGill International Finance Symposium in Montreal, 2003; at the FMA-Europe meetings in Dublin, 2003; and at the Western Finance Association Meetings in Vancouver, 2004, for useful comments or discussions. Kailong Kai, Peter Hwang, and Chi Sheh provided exemplary research assistance. An earlier version of this article was presented as “Cross-Border Acquisitions and International Corporate Governance: Theory and Evidence from Foreign Stock Listings in the U.S.” All remaining shortcomings are our own responsibility.


We theoretically and empirically examine the role of international takeover markets in curtailing dominant shareholder moral hazard for firms with higher value-added from acquisitions. In equilibrium, such firms strategically list shares in the markets of their targets and voluntarily dilute dominant shareholder control through capital-raising events to lower their expected acquisition costs. Empirical tests, using a sample of foreign firms cross-listing on U.S. stock exchanges during 1990–2003, support the framework. We find a strong influence of post-listing dilution of dominant shareholder control through capital-raising events on the likelihood of acquisitions and their cost to the acquirers, in both U.S. and non-U.S. markets.