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Do Foreigners Invest Less in Poorly Governed Firms?

  • Leuz, Christian

    (U of Chicago)

  • Lins, Karl V.

    (U of Utah)

  • Warnock, Francis E.

    (U of Virginia)

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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File URL: http://home.business.utah.edu/finkvl/RFS%20LLW%20Foreign%20Holdings.pdf
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Paper provided by University of Pennsylvania, Wharton School, Weiss Center in its series Working Papers with number 07-2.

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Date of creation: Apr 2007
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Handle: RePEc:ecl:upafin:07-2
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