Statecraft through State-directed Private Governance: Regulatory Guidelines Improve Business Sanction Compliance in Cross-border M&As

26 September 2024, Version 1
This content is an early or alternative research output and has not been peer-reviewed at the time of posting.

Abstract

Governments increasingly encourage private companies to self-regulate and voluntarily avoid risky businesses to comply with economic sanctions. Does state-led private governance work, and if so, how? I argue that state-directed private governance improves prudence among firms with high perceived business-specific and transaction-specific risks. Focusing on a 2019 US framework, I examine private sanction compliance in cross-border mergers and acquisitions (M&As). Empirically, I develop a sector-based measure of business-specific sanction risk perception using past OFAC enforcement cases. I then conduct transaction-level analyses on 7,749 cross-border M&As from the Orbis dataset. Post-framework, M&As involving risky-sector acquirers are, on average, 18% less likely to succeed if due diligence extends beyond five months, indicating significant transaction-specific risks. This reduction in success could reach 68% when due diligence lasts 33 months. However, this difference is insignificant pre-framework. These findings suggest that private self-regulation complements state regulatory oversight in economic statecraft, enabling informed business decisions.

Keywords

economic statecraft
private governance
state-business relations
regulation

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