NCPA - National Center for Policy Analysis

Labor Regulations in Cross-Border Business Deals

September 3, 2015

New research from the Cato Institute seeks to demonstrate the relationship between cross-country differences in labor regulations and cross-border mergers and acquisitions. Using three measures of labor regulations, the study identified a strong empirical connection between labor regulations and both abnormal stock returns and profits for the acquiring firm.

  • The value of cross-border acquisitions has risen $500 billion since the 1990s.
  • Cross-border deals account for 39 percent of all acquisitions, up from 24 percent in 2000.
  • Labor market flexibility could be especially important for the success of acquisitions since acquiring firms often restructure targets to minimize labor costs and maximize synergies, according to the study.

Researchers measured the degree to which labor laws impede employers from firing workers, modifying work hours, or employing part-time workers; the strictness of regulations on dismissals constructed by the Organization for Economic Cooperation and Development; and the proportion of the unemployed individuals supported by unemployment benefits. They found that the financial status of an acquiring firm responded most positively to cross-border acquisitions of targets in countries with comparatively weak labor regulations when the target is in a labor-dependent industry.

Source: Ross Levine et al., "Cross-Border Acquisitions and Labor Regulations," Cato Institute, August 26, 2015.

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