Use of comment letters for mergers and acquisitions in a setting with weak investor protection: the Chinese experience

Kefu Lyu, Huiying Wu, Sammy Xiaoyan Ying, Jiaxing You

Research output: Contribution to journalArticlepeer-review

Abstract

We adopt a principal–principal perspective to examine whether comment letters for mergers and acquisitions (M&A) protect shareholders, particularly minority shareholders, of acquiring firms in China, where investor protection is weak. This public enforcement tool has several features: (i) regulators provide detailed comments on various matters, (ii) various stakeholders are called upon to respond, and (iii) failure to adequately address the comments to the satisfaction of regulators results in M&A applications being rejected. Our main results show that M&A comment letters affect the outcome of M&A transactions by reducing acquisition premium and improving the fulfillment of performance commitment. Furthermore, this effect is more pronounced when the principal–principal conflict is more severe, as indicated by a greater divergence between cash flow rights and control rights, along with weaker monitoring by multiple large shareholders. Our results suggest that M&A comment letters, if used appropriately, effectively enhance investor protection in less developed economies. We contribute to the literature by providing new evidence of the effects of M&A comment letters in settings with weak investor protection.

Original languageEnglish
Article number107227
Number of pages20
JournalJournal of Accounting and Public Policy
Volume46
DOIs
Publication statusPublished - 2024

Bibliographical note

Publisher Copyright:
© 2024 Elsevier Inc.

Keywords

  • China
  • Comment letter
  • Countries with weak investor protection
  • Mergers and acquisitions
  • Public enforcement

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