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

See all articles by David Godsell

David Godsell

University of Illinois at Urbana-Champaign

Ugur Lel

University of Georgia - Department of Banking and Finance; European Corporate Governance Institute (ECGI)

Darius P. Miller

Southern Methodist University (SMU) - Finance Department

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

Godsell, David and Lel, Ugur and Miller, Darius P., Financial Protectionism, Takeover Activity, and Shareholder Wealth: Evidence from the Foreign Investment and National Security Act (October 1, 2016). Available at SSRN: https://ssrn.com/abstract=2858548 or http://dx.doi.org/10.2139/ssrn.2858548

David Godsell (Contact Author)

University of Illinois at Urbana-Champaign ( email )

Champaign, IL 61820
United States
1.217.300.0844 (Phone)

HOME PAGE: http://giesbusiness.illinois.edu/profile/david-godsell

Ugur Lel

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Darius P. Miller

Southern Methodist University (SMU) - Finance Department ( email )

United States

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