How do firms protect themselves against infringements of their property rights by their own government? The authors develop a theory based on international law and joint asset ownership with foreign firms. Investment agreements protect the assets of foreign firms but are not available to domestic firms. This segmentation of the property rights environment creates a rationale for international financial relationships between firms. By forming financial relationships with foreign firms, domestic firms gain indirect coverage from the property rights available to foreign firms under investment agreements. If a government is less likely to violate the property rights of covered foreign firms, it is also less likely to violate property rights for assets held jointly by domestic and foreign firms. This article presents systematic evidence from data on the activities of firms in countries that have investment agreements with the United States. International financial relationships between firms, through mergers and acquisitions as well as through bond and equity issues, are more common where property rights are weak. The theory suggests a political logic to the fragmentation of firm-ownership stakes across jurisdictions, offers an institutional explanation of international financial flows, and identifies new distributional consequences of international law.
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