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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 factors that influence whether foreign investors provide capital to a country's firms. This study uses a unique and comprehensive dataset of foreign holdings by U.S. investors from 1997 to examine whether and why concerns about corporate governance results in fewer foreign holdings. Based on a sample of 4409 firms from 29 countries, we find that foreigners invest significantly less in firms with ownership structures that are more conducive to governance problems and, at the same time, reside in countries with poor outsider protection and disclosure. We argue that information asymmetry and monitoring costs faced by foreign investors are likely to drive this result. Supporting this explanation, we show that foreign investment is lower in firms that have opaque earnings and 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.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12192.
    Handle: RePEc:nbr:nberch:12192
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