A friend indeed? The effect of regulatory shareholder on overpayment in mergers and acquisitions

To protect minority shareholders, China introduced the China Securities Investor Services Center Co., Ltd. (CSISC), which has become a quasi-regulatory minority shareholder in listed companies. This regulatory innovation offers a unique opportunity to investigate a novel approach that regulators worldwide can adopt to protect minority shareholders’ interests. We find that the CSISC protects the interests of minority shareholders during particularly vulnerable periods, such as mergers and acquisitions (M&As). Specifically, excess goodwill, a proxy for overpayment in M&As, is lower when CSISC activism is present. This decrease is economically significant, showing a 33.86% reduction in excess goodwill in M&As involving CSISC activism. Moreover, this effect is more pronounced in firms with greater mispricing, poorer information environments, and fewer political connections. Our findings suggest that the CSISC is an effective protection mechanism for minority shareholders.