Cross-border block share purchases and transfer of corporate governance

Cross-border block share purchases represent a unique form of corporate restructuring that allow firms to alter the level of shareholder protection, while leaving target firms continuing as a going concern. In this study, I empirically investigate the announcement effects in stock returns and long-term stock market performance for target firms that represent large share acquisitions by foreign companies. In addition, I test the governance transfer hypothesis which states that target firms usually import the higher quality of shareholder protection of foreign acquirers in a more-protective legal system. This study documents the relationships between stock market performance and legal protection of shareholders' rights by employing a sample of cross-country block purchases, including 240 public target firms from 37 countries, spanning the period from January 1990 to December 2000. I find that the announcement returns for target firms are positive, and they are significantly higher for targets acquired by companies coming from countries with higher levels of shareholder protection. Interestingly, in the long run, target firms from countries with poor shareholder protection significantly underperform the benchmark, or the local market index. I do not find evidence of cross-border governance transfer in the long run. This study is the first attempt to document both the announcement effects and long-term stock market performance of cross-country block purchases, which are associated with different legal systems and shareholder protection in target and acquiring firms.