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Do international portfolio investors follow firms’ foreign investment decisions?

  • De Santis, Roberto A.
  • Ehling, Paul

We analyze the interlinkages between foreign direct investment (FDI) and foreign portfolio investment (FPI) between Germany and the major economies. First, we show that Tobin’s q helps explaining the variation of the growth rate of the stock of FDI. Second, we show that foreign and the home stock market returns explain the ariation of the growth rate of the stock of FPI. Most importantly, we find that information about foreign fundamentals is revealed via direct investment. In other words, FDI transactions measured by fitted growth rates of the stock of FDI help explaining current growth rates of the stock of FPI. To our knowledge this observation is the first unambiguous evidence that international portfolio investors follow firms’ expected foreign investment decisions. JEL Classification: F21, F23, G11, G15

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Paper provided by European Central Bank in its series Working Paper Series with number 0815.

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Date of creation: Sep 2007
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Handle: RePEc:ecb:ecbwps:20070815
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