In our paper, Corporate Governance Reforms and Cross-Border Acquisitions, which was recently made publicly available on SSRN, we investigate how investor protection affects the allocation of foreign capital inflows at the firm level. A simple model provides an explanation for a well-documented but little understood phenomenon on international capital flows—the tendency of foreign investors to target better-performing firms in emerging markets.

When a foreign acquirer‘s country has stronger IP than a target country, the acquirer‘s controlling shareholder values control premiums less than controlling shareholders of local firms because stronger IP imposes greater constraints on diversion for private benefits. Within the target country, controlling shareholders of firms with more profitable investments take fewer private benefits and, hence, demand lower control premiums. Foreign acquirers, which value control premiums less, will target firms with more profitable investments. This cherry picking tendency will intensify (moderate) as the IP gap between the acquirer and target countries increases (decreases).

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