Financial Protectionism, Takeover Activity, and Shareholder Wealth: Evidence from the Foreign Investment and National Security Act
43 Pages Posted: 25 Oct 2016 Last revised: 27 Mar 2018
Date Written: October 1, 2016
Abstract
This paper examines changes in takeover activity and stock market valuations around a significant law change that increased the protection of some U.S. industries against foreign acquirers. The amendments to the Defense Production Act of 1950 following from the Foreign Investment and National Security Act of 2007 (FINSA) increased frictions for foreign investors seeking to acquire equity stakes in a large array of U.S. industries comprising approximately one-fourth of the CRSP/Compustat universe. We find that following FINSA, the probability of being acquired by foreign investors decreased by 2.6% for FINSA-affected firms (treatment sample) compared to unaffected firms (control sample). Treatment firms on average lost 0.83% of their value ($35.75 billion in total) on a three day window surrounding the events related to the passage and implementation of FINSA. Across the event dates examined, we find negative (positive) cumulative abnormal returns (CARs) for FINSA-affected firms as the probability and severity of FINSA legislation and enforcement increases (decreases). Across treatment firms, CARs vary with firm-level predicted probability of future foreign investment and strength of corporate governance. Our findings suggest that increased federally legislated financial protectionism harms shareholder wealth due to a less liquid market for corporate control.
Keywords: FINSA, protectionist laws, economic nationalism, mergers and acquisitions laws, event study analysis, corporate control
JEL Classification: F52, G14, G34, G38, K22
Suggested Citation: Suggested Citation