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Do Foreign Owners Favor Short-Term Profit? Evidence from Germany

  • Verena Dill
  • Uwe Jirjahn
  • Stephen C. Smith

Comparing domestic- and foreign-owned firms in Germany, this paper finds that foreign-owned firms are more likely to focus on short-term profit. This influence is particularly strong if the local managers of the German subsidiary are not sent from the foreign parent company. Moreover, the physical distance between the foreign parent company and its German subsidiary increases the probability of focusing on short-term profit. These findings conform to the hypothesis that foreign owners facing an information disadvantage concerning the local conditions of their subsidiaries are more likely to favor short-term profit. However, we do not identify differences in “short- termism” between investors from “Anglo-Saxon” and other foreign countries; rather, results point in the direction of more general features of international business investment.

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Paper provided by University of Trier, Department of Economics in its series Research Papers in Economics with number 2013-01.

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Length: 33 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:trr:wpaper:201301
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  1. Nicholas Bloom & John Van Reenen, 2010. "Why Do Management Practices Differ across Firms and Countries?," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 203-24, Winter.
  2. Kalok Chan & Vicentiu Covrig & Lilian Ng, 2005. "What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide," Journal of Finance, American Finance Association, vol. 60(3), pages 1495-1534, 06.
  3. Bae, Kee-Hong & Stulz, Rene M. & Tan, Hongping, 2006. "Do Local Analysts Know More? A Cross-Country Study of the Performance of Local Analysts and Foreign Analysts," Working Paper Series 2005-18, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  4. George Baker, 2002. "Distortion and Risk in Optimal Incentive Contracts," Journal of Human Resources, University of Wisconsin Press, vol. 37(4), pages 728-751.
  5. Berger, Johannes & Herbertz, Claus & Sliwka, Dirk, 2011. "Incentives and Cooperation in Firms: Field Evidence," IZA Discussion Papers 5618, Institute for the Study of Labor (IZA).
  6. Caves,Richard E., 2007. "Multinational Enterprise and Economic Analysis," Cambridge Books, Cambridge University Press, number 9780521677530.
  7. Christian Bellak, 2004. "How Domestic and Foreign Firms Differ and Why Does It Matter?," Department of Economics Working Papers wuwp087, Vienna University of Economics and Business, Department of Economics.
  8. Andrew B. Bernard & Fredrik Sjoholm, 2003. "Foreign Owners and Plant Survival," NBER Working Papers 10039, National Bureau of Economic Research, Inc.
  9. R Greg Bell & Igor Filatotchev & Abdul A Rasheed, 2012. "The liability of foreignness in capital markets: Sources and remedies," Journal of International Business Studies, Palgrave Macmillan, vol. 43(2), pages 107-122, February.
  10. Caves,Richard E., 2007. "Multinational Enterprise and Economic Analysis," Cambridge Books, Cambridge University Press, number 9780521860130.
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