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Do Foreigners Invest Less in Poorly Governed Firms?

In: Corporate Governance

  • Christian Leuz
  • Karl V. Lins
  • Francis E. Warnock

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's 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's economic development but appears to be directly related to a country's 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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This chapter was published in:
  • Michael Weisbach, 2010. "Corporate Governance," NBER Books, National Bureau of Economic Research, Inc, number weis10-1, October.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12192.
    Handle: RePEc:nbr:nberch:12192
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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