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Fire Sale FDI

Author

Listed:
  • Hyun Song Shin

    (Princeton University)

  • Viral Acharya

    (New York University)

  • Tanju Yorulmazer

    (Federal Reserve Bank of New York)

Abstract

Some financial crises are characterized by the simultaneous outflow of foreign portfolio investment and an inflow of foreign direct investment (FDI) in which foreign investors take controlling stakes in distressed firms. We explore an agency-theoretic framework for this phenomenon. Transfer of control that overcomes agency problems are made possible during crises, but, at the same time, efficient owners (e.g. other domestic firms) face financing constraints. The result is a transfer of ownership to foreign firms, including inefficient ones, at fire sale prices. These stakes are subsequently re-sold, or “flipped†back to local investors once the crisis abates. The theory finds strong empirical support during the Asian crisis.

Suggested Citation

  • Hyun Song Shin & Viral Acharya & Tanju Yorulmazer, 2011. "Fire Sale FDI," Korean Economic Review, Korean Economic Association, vol. 27, pages 163-202.
  • Handle: RePEc:kea:keappr:ker-20111231-27-2-01
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Rahul Mukherjee & Christian Proebsting, 2015. "Survival of the Fittest: Corporate Control and the Cleansing Effect of Financial Crises," IHEID Working Papers 20-2015, Economics Section, The Graduate Institute of International Studies, revised 01 Oct 2015.
    2. Koralai Kirabaeva & Assaf Razin, 2009. "Composition of International Capital Flows: A Survey," NBER Working Papers 15599, National Bureau of Economic Research, Inc.
    3. Zhou, Yue Maggie & Li, Xiaoyang & Svejnar, Jan, 2011. "Subsidiary divestiture and acquisition in a financial crisis: Operational focus, financial constraints, and ownership," Journal of Corporate Finance, Elsevier, vol. 17(2), pages 272-287, April.
    4. Alquist, Ron & Mukherjee, Rahul & Tesar, Linda, 2016. "Fire-sale FDI or business as usual?," Journal of International Economics, Elsevier, vol. 98(C), pages 93-113.
    5. Olga Stoddard & Ilan Noy, 2015. "Fire-sale FDI? The Impact of Financial Crises on Foreign Direct Investment," Review of Development Economics, Wiley Blackwell, vol. 19(2), pages 387-399, May.
    6. Koralai Kirabaeva & Assaf Razin, 2010. "Composition of Capital Flows: A Survey," NBER Working Papers 16492, National Bureau of Economic Research, Inc.
    7. Acharya, Viral V & Viswanathan, S. Vish, 2008. "Moral Hazard, Collateral and Liquidity," CEPR Discussion Papers 6630, C.E.P.R. Discussion Papers.
    8. Contessi, Silvio & De Pace, Pierangelo, 2009. "Do European capital flows comove?," The North American Journal of Economics and Finance, Elsevier, vol. 20(2), pages 145-161, August.
    9. Xingwang Qian & Andreas Steiner, 2014. "International Reserves and the Composition of Foreign Equity Investment," Review of International Economics, Wiley Blackwell, vol. 22(2), pages 379-409, May.
    10. Viral V. Acharya & Douglas Gale & Tanju Yorulmazer, 2011. "Rollover Risk and Market Freezes," Journal of Finance, American Finance Association, vol. 66(4), pages 1177-1209, August.
    11. Huang, Yasheng & Ma, Yue & Yang, Zhi & Zhang, Yifan, 2016. "A fire sale without fire: An explanation of labor-intensive FDI in China," Journal of Comparative Economics, Elsevier, vol. 44(4), pages 884-901.
    12. Kara, Gazi Ishak, 2016. "Systemic risk, international regulation, and the limits of coordination," Journal of International Economics, Elsevier, vol. 99(C), pages 192-222.

    More about this item

    Keywords

    Flight; FDI Flows; Foreign Takeovers; Flipping;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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