Signaling, Compliance, and Learning in CFIUS M&A Reviews

• In Event: Firms in Trade with China

Abstract

This paper explores the strategic environment in which firms decide whether to voluntarily submit their pending cross-border merger or acquisition to the U.S. government for a review of the transaction’s national security implications. On the one hand, such reviews are costly, delay deal closings, and could result in the government blocking the transaction or imposing costly conditions. On the other hand, transactions that clear government review are given safe harbor, protecting them from future government interference. This is valuable, particularly within an environment in which governments’ beliefs over what constitutes a national security risk are expanding. The government also faces a trade-off: it wants high-risk transactions notified, but since review is also costly to the government, it prefers that firms do not submit very low-risk transactions for review. We model a game in which the government can provide information about what kinds of transactions are most likely to create actionable risk for the government and firms decide whether to file. When the government’s beliefs regarding national security risks are unstable, firms are more likely to over-comply by submitted low-risk transactions for review. Using data on CFIUS filings gleaned from SEC disclosure documents, we test the observable implications of the model. Our findings speak to broader theoretical debates over signaling and information transmission between government regulators and firms under conditions of uncertainty, regulatory compliance and optimal design, and ways in which foreign firms learn from the experience of their co-industrials and co-nationals.

Authors

• Sarah Bauerle Danzman, Indiana University

• Andrey Tomashevskiy, Rutgers University

• Sichen Li, University of California, San Diego

• Gyu Sang Shim, Texas A&M University