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A general theory of corporate international investment under incomplete information, short sales and taxes

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  • Bellalah, Mondher
  • Bradford, Marc
  • Zhang, Detao

Abstract

The theory of corporate international investment is extended to account for the effects of information costs, short sales and taxes on the management decision process. Our results explain how real exchange risk, competition and diversification gains affect corporate international investment decisions in this setting. The model includes clear forward looking explanations of some anomalies in the literature such as the ‘home bias puzzle’ in international finance.

Suggested Citation

  • Bellalah, Mondher & Bradford, Marc & Zhang, Detao, 2016. "A general theory of corporate international investment under incomplete information, short sales and taxes," Economic Modelling, Elsevier, vol. 58(C), pages 615-626.
  • Handle: RePEc:eee:ecmode:v:58:y:2016:i:c:p:615-626
    DOI: 10.1016/j.econmod.2016.03.013
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    References listed on IDEAS

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    1. Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2010. "Financing Development: The Role of Information Costs," American Economic Review, American Economic Association, vol. 100(4), pages 1875-1891, September.
    2. Fabio Verona, 2014. "Investment Dynamics with Information Costs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(8), pages 1627-1656, December.
    3. Oliver Volckart, 2006. "The Influence of Information Costs on the Integration of Financial Markets: Northern Europe, 1350-1560," SFB 649 Discussion Papers SFB649DP2006-049, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    4. Solnik, Bruno H., 1974. "An equilibrium model of the international capital market," Journal of Economic Theory, Elsevier, vol. 8(4), pages 500-524, August.
    5. Iamsiraroj, Sasi & Ulubaşoğlu, Mehmet Ali, 2015. "Foreign direct investment and economic growth: A real relationship or wishful thinking?," Economic Modelling, Elsevier, vol. 51(C), pages 200-213.
    6. Mondher Bellalah & Zhen Wu, 2009. "A simple model of corporate international investment under incomplete information and taxes," Annals of Operations Research, Springer, vol. 165(1), pages 123-143, January.
    7. Azman-Saini, W.N.W. & Baharumshah, Ahmad Zubaidi & Law, Siong Hook, 2010. "Foreign direct investment, economic freedom and economic growth: International evidence," Economic Modelling, Elsevier, vol. 27(5), pages 1079-1089, September.
    8. Black, Fischer, 1974. "International capital market equilibrium with investment barriers," Journal of Financial Economics, Elsevier, vol. 1(4), pages 337-352, December.
    9. Ahearne, Alan G. & Griever, William L. & Warnock, Francis E., 2004. "Information costs and home bias: an analysis of US holdings of foreign equities," Journal of International Economics, Elsevier, vol. 62(2), pages 313-336, March.
    10. Canfei He, 2002. "Information costs, agglomeration economies and the location of foreign direct investment in China1," Regional Studies, Taylor & Francis Journals, vol. 36(9), pages 1029-1036.
    11. Jongmooo Jay Choi, 1989. "Diversification, Exchange Risks and Corporate International Investment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 20(1), pages 145-155, March.
    12. Wei, Xuan & Thornsbury, Suzanne, 2012. "Firm level export decisions: The role of information cost," Economics Letters, Elsevier, vol. 116(3), pages 487-490.
    13. Wu, Chunchi & Li, Qiang & Weii, K C John, 1996. "Incomplete-Information Capital Market Equilibrium with Heterogeneous Expectations and Short Sale Restrictions," Review of Quantitative Finance and Accounting, Springer, vol. 7(2), pages 119-136, September.
    14. Stulz, Rene M, 1981. "On the Effects of Barriers to International Investment," Journal of Finance, American Finance Association, vol. 36(4), pages 923-934, September.
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    Cited by:

    1. Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2010. "Financing Development: The Role of Information Costs," American Economic Review, American Economic Association, vol. 100(4), pages 1875-1891, September.
    2. repec:eee:ecmode:v:67:y:2017:i:c:p:316-324 is not listed on IDEAS

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