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Shareholder Protection, Ownership Concentration and FDI

  • Vahe Lskavyan
  • Mariana Spatareanu

    ()

Host country’s weaker legal shareholder protection may make it costlier for parent shareholders to monitor the foreign subsidiary and hold managers accountable in case of misconduct. This prospect may motivate the managers to invest in such foreign environments. However, the agency costs associated with such investments can increase as well. The latter would tend to discourage such FDI. We test this ex ante uncertain relationship using a sample of publicly quoted UK parents that established new, majority owned joint venture subsidiaries in continental Europe. We find that host country’s weak legal shareholder protection discourages FDI. This negative relationship, however, is less important for firms with higher ownership concentration, implying that parent’s ownership concentration may be a substitute for host country’s weak legal shareholder protection.

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Paper provided by Department of Economics, Rutgers University, Newark in its series Working Papers Rutgers University, Newark with number 2010-003.

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Length: 34 pages
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:run:wpaper:2010-003
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