Formal institutions and acquisitions of non-controlling equity stakes

Formal institutions shape the governance of economic, legal and social relations and have the purpose of mitigating agency problems. While prevalent research theorizes that firms’ ownership structure tends to become less concentrated as formal institutions protect minority shareholders more strongly, more recent theoretical arguments posit an opposite relationship. A joint read of these perspectives suggests that both strong and weak protection encourages concentrated ownership. In this paper, we contend that these mixed results may be, at least partially, due to the large focus of research on takeover acquisitions and to the neglect of acquisitions of minority equity stakes. While previous studies suggest that controlling shareholders may have incentives to own large equity stakes both under weak and strong shareholder protection, this work argues that minority shareholders have no incentive to own small equity shares when formal institutions weakly protect their interests. Consequently, we argue that firms that acquire a minority equity stake will tend to purchase larger portions of the target’s equity when shareholder protection and the quality of the institutional environment are weaker. We find support of these hypotheses on a global sample of 218 minority acquisitions. The results of this study shed further light on the relationship between ownership structure and formal institutions and expand the still limited literature on minority acquisitions.