Czech Mate - Review of Finance(2008 12 221251 doi 10.1093\/rof\/rfl005 Advance Access publication 31 January 2007 Czech Mate Expropriation and Investor

Czech Mate - Review of Finance(2008 12 221251 doi...

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Review of Finance (2008) 12: 221–251 doi: 10.1093/rof/rfl005 Advance Access publication: 31 January 2007 Czech Mate: Expropriation and Investor Protec- tion in a Converging World MIHIR A. DESAI 1 and ALBERTO MOEL 2 1 Harvard University and NBER; 2 Monitor Group Abstract. This paper examines the expropriation of a foreign investor by a local partner and the subsequent resolution of the case through international arbitration in favor of the investor. Despite the investor’s 99% interest in the joint venture, the local partner managed to divert the entire value of the underlying entity for his personal benefit. This clinical examination of an expropriation and its aftermath illustrates the interaction of property and contract rights in a global setting, how corporate control is shaped by geography, and how multinational firms may be advantaged by availing themselves of stronger investor protections than local firms. JEL Classification : F21, F23, F36, F42, G15 1. Introduction Analyses of the role of institutions typically consider local laws to be the primary measure of legal protections for investors. Similarly, these analyses do not discriminate between types of investors, other than on the basis of their ownership shares or control rights. In contrast to these emphases, multinational firms constitute large fractions of investment in most economies, particularly in developing and transition economies, and these firms have legal means available to them beyond local laws as well as unique control problems. Studying the experience of multinational firms and their legal protections through a clinical examination promises to illuminate the unique aspects * Kathleen Luchs, Stephen Marks and Hardy Tey provided excellent research assistance. The authors thank Sasha Greenawalt and Michael Ostrove of Debevoise & Plimpton, Petr Panek of White & Case, and Milan Smid of Charles University for help in understanding the Czech legal and regulatory environment; and Dan Bergstresser, John Coffee, Tom Copeland, Benjamin Esty, Josh Lerner, Kathleen Luchs, John Owen, James Zeitler, various seminar and conference participants, the editor (Colin Mayer) and an anonymous referee for very helpful comments on earlier drafts. Desai thanks the Division of Research at Harvard Business School for financial support. The Author 2007. Published by Oxford University Press on behalf of the European Finance Association. All rights reserved. For Permissions, please email: [email protected] at York University Libraries on March 8, 2012 Downloaded from
222 MIHIR A. DESAI AND ALBERTO MOEL of their control problems, the transnational protections they can access and the interactions between different types of institutional protections in institutionally fragile settings.

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