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Do Foreigners Invest Less in Poorly Governed Firms?

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Author Info
Christian Leuz
Karl V. Lins
Francis E. Warnock

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Abstract

As domestic sources of outside finance are limited in many countries around the world, it is important to understand the factors that influence whether foreign outside investors provide capital to a country%u2019s firms. This study examines whether and why investor concern about corporate governance results in fewer foreign holdings. We use a comprehensive set of foreign holdings by U.S. investors as a proxy for foreign investment and analyze a sample of 4,411 firms from 29 emerging market and developed economies. We find that foreigners invest significantly less in firms that are poorly governed, i.e., firms that have ownership structures that are more conducive to outside investor expropriation. Interestingly, this finding is not simply a matter of a country%u2019s economic development but appears to be directly related to a country%u2019s information rules and legal institutions. We therefore argue that information problems faced by foreign investors play an important role in this result. Supporting this explanation, we show that foreign investment is lower in firms that appear to engage in more earnings management.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12222.

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Date of creation: May 2006
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Publication status: published as forthcoming Review of Financial Studies
Handle: RePEc:nbr:nberwo:12222

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G3 - Financial Economics - - Corporate Finance and Governance
F3 - International Economics - - International Finance

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Woochan Kim & Taeyoon Sung & Shang-Jin Wei, 2008. "How Does Corporate Governance Risk at Home Affect Investment Choices Abroad?," NBER Working Papers 13721, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Kee-Hong Bae & Rene M. Stulz & Hongping Tan, 2005. "Do Local Analysts Know More? A Cross-Country Study of the Performance of Local Analysts and Foreign Analysts," NBER Working Papers 11697, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Charles P. Thomas & Francis E. Warnock & Jon Wongswan, 2006. "The Performance of International Equity Portfolios," NBER Working Papers 12346, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Giannetti, Mariassunta & Yu, Xiaoyun, 2007. "Favouritism or Markets in Capital Allocation?," CEPR Discussion Papers 6124, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Michael R. King & Dan Segal, 2006. "The Long-Term Effects of Cross-Listing Investor Recognition, and Ownership Structure on Valuation," Working Papers 06-44, Bank of Canada. [Downloadable!]
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